PART
I
Item 1.
|
Identity
of Directors, Senior Management and Advisers
|
Not
applicable for annual reports on Form 20-F.
Item 2.
|
Offer
Statistics and Expected Timetable
|
Not
applicable for annual reports on Form 20-F.
A.
Selected Financial Data
The
following table presents the selected consolidated financial information for our company. The selected consolidated statements
of comprehensive income data for the two years ended December 31, 2018, 2017 and 2016 and the selected consolidated balance sheets
data as of December 31, 2018 and 2017 have been derived from our audited consolidated financial statements, which are included
in this annual report beginning on page F-1. The selected consolidated balance sheet data for the year ended December 31, 2016
have been derived from our audited consolidated balance sheet as of December 31, 2016, which is not included in this annual report.
The selected consolidated statements of operations data for the years ended June 30, 2015 and 2014 and the selected consolidated
balance sheet data as of ended December 31, 2015 and 2014 have been derived from our audited consolidated financial statements
for the years ended December 31, 2015 and 2014, which are not included in this annual report. Our historical results do not necessarily
indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with,
and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item
5. Operating and Financial Review and Prospects” below. Our audited consolidated financial statements are prepared and presented
in accordance with US GAAP.
Please note that our results of operations related to Great Plastics have been reclassified as discontinued
operations on a retrospective basis for all periods presented.
(All
amounts in thousands of U.S. dollars, except Dividend per share in Renminbi and Shares outstanding)
Statement
of operations data:
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues
|
|
$
|
138,664
|
|
|
$
|
124,209
|
|
|
$
|
102,321
|
|
|
$
|
88,994
|
|
|
$
|
80,369
|
|
Gross profit
|
|
$
|
29,750
|
|
|
$
|
26,132
|
|
|
$
|
25,191
|
|
|
$
|
23,235
|
|
|
$
|
21,562
|
|
Operating expenses
|
|
$
|
19,584
|
|
|
$
|
17,042
|
|
|
$
|
14,588
|
|
|
$
|
13,160
|
|
|
$
|
10,655
|
|
Income from operations
|
|
$
|
10,166
|
|
|
$
|
9,089
|
|
|
$
|
10,603
|
|
|
$
|
10,075
|
|
|
$
|
10,907
|
|
Provision for Income taxes
|
|
$
|
1,126
|
|
|
$
|
788
|
|
|
$
|
1,561
|
|
|
$
|
1,123
|
|
|
$
|
1,236
|
|
Net income from continuing operations
|
|
$
|
9,847
|
|
|
$
|
8,266
|
|
|
$
|
10,249
|
|
|
$
|
9,428
|
|
|
$
|
9,274
|
|
Net loss from discontinued operations, net of tax
|
|
$
|
(88
|
)
|
|
$
|
(1,975
|
)
|
|
$
|
(2,306
|
)
|
|
$
|
(1,480
|
)
|
|
$
|
(1,546
|
)
|
Net income
|
|
$
|
9,759
|
|
|
$
|
6,291
|
|
|
$
|
7,943
|
|
|
$
|
7,948
|
|
|
$
|
7,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations per share (basic and diluted)
|
|
$
|
0.62
|
|
|
$
|
0.52
|
|
|
$
|
0.65
|
|
|
$
|
0.76
|
|
|
$
|
0.79
|
|
Net income from discontinued operations per share (basic and diluted)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per share in USD
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.88
|
|
Dividend per share in Renminbi
|
|
¥
|
-
|
|
|
¥
|
-
|
|
|
¥
|
-
|
|
|
¥
|
-
|
|
|
¥
|
5.41
|
|
Balance
sheet data:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current assets
|
|
$
|
59,520
|
|
|
$
|
57,013
|
|
|
$
|
47,830
|
|
|
$
|
49,846
|
|
|
$
|
34,701
|
|
Total assets
|
|
$
|
122,640
|
|
|
$
|
116,730
|
|
|
$
|
94,265
|
|
|
$
|
75,729
|
|
|
$
|
57,224
|
|
Current liabilities
|
|
$
|
47,489
|
|
|
$
|
55,562
|
|
|
$
|
42,281
|
|
|
$
|
32,411
|
|
|
$
|
39,769
|
|
Total liabilities
|
|
$
|
57,906
|
|
|
$
|
58,736
|
|
|
$
|
44,793
|
|
|
$
|
32,411
|
|
|
$
|
39,769
|
|
Total shareholders’ equity (net assets)
|
|
$
|
64,734
|
|
|
$
|
57,994
|
|
|
$
|
49,472
|
|
|
$
|
43,319
|
|
|
$
|
17,454
|
|
Capital stock
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
12
|
|
Shares outstanding
|
|
|
15,795,910
|
|
|
|
15,780,205
|
|
|
|
15,756,500
|
|
|
|
15,732,795
|
|
|
|
11,666,667
|
|
Exchange
Rate Information
Our
financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the
PRC. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s
Bank of China at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency
other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our financial statements
have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. The financial information
is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and
average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the
capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated
other comprehensive income (loss) in shareholders’ equity. The relevant exchange rates are listed below:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
US $1: RMB exchange rate
|
|
|
Period
End
|
|
|
|
6.8776
|
|
|
|
Period
End
|
|
|
|
6.5074
|
|
|
|
Period
End
|
|
|
|
6.94477
|
|
|
|
|
Average
|
|
|
|
6.6163
|
|
|
|
Average
|
|
|
|
6.7578
|
|
|
|
Average
|
|
|
|
6.64410
|
|
We
make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as
the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part
through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not
currently engage in currency hedging transactions.
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated
(
www.oanda.com
).
|
|
Midpoint
of Buy and Sell Prices
for U.S. Dollar per RMB
|
|
Period
|
|
Period-End
|
|
|
Average
|
|
|
High
|
|
|
Low
|
|
2014
|
|
|
6.1484
|
|
|
|
6.1458
|
|
|
|
6.2080
|
|
|
|
6.0881
|
|
2015
|
|
|
6.4917
|
|
|
|
6.2288
|
|
|
|
6.4917
|
|
|
|
6.0933
|
|
2016
|
|
|
6.9448
|
|
|
|
6.6441
|
|
|
|
7.0672
|
|
|
|
6.4494
|
|
2017
|
|
|
6.5074
|
|
|
|
6.7578
|
|
|
|
6.9535
|
|
|
|
6.4686
|
|
2018
|
|
|
6.8776
|
|
|
|
6.6163
|
|
|
|
6.9720
|
|
|
|
6.2660
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.7035
|
|
|
|
6.7917
|
|
|
|
6.8772
|
|
|
|
6.7035
|
|
February
|
|
|
6.6876
|
|
|
|
6.7401
|
|
|
|
6.7790
|
|
|
|
6.6868
|
|
March
|
|
|
6.7119
|
|
|
|
6.7129
|
|
|
|
6.7342
|
|
|
|
6.6912
|
|
As of March 31, 2019, the exchange rate is
RMB 6.7119 to $1.00.
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
Risks
Related to Our Business and Industry
Changes
in U.S. trade policies, including new and potential tariffs on goods and raw materials imported from China, have negatively affected
us and may disrupt our business and have a material adverse effect on our financial condition and results of operations.
Due
to the trade conflicts between U.S. and China, more and more goods and raw materials imported from China are subject to higher
tariffs levied by the U.S. Previously we imported a lot of plastic straws from China to the wholesale distributors in the U.S.
We also imported polypropylene materials from China to our Allentown factory to produce plastic straws for fast food restaurants.
The tariffs levied by the U.S. on these plastic straws and polypropylene materials have increased 25%. We have to absorb most
of the increased cost for the plastic straws to sell to the wholesale distributors in the U.S. We also have to purchase
more expensive polypropylene materials from other countries.
In
addition, the tariff on paper cups and paper board imported from China has also increased 10%. The increased tariff on paper board
which we planned to use to produce paper cups in Allentown is the major reason that we have paused our paper cup manufacturing
project in Allentown.
Although
we plan to start operating a factory in Mexico to enjoy the tariff-free benefit on producing paper cups, paper straws and plastic
straws and shipping them from Mexico to U.S., the amount of the products to be produced in Mexico will not account a significant
percentage of our total products in the near future. In addition, we cannot guarantee we will be successful on this strategy.
Our
U.S. competitors are significantly larger than our company.
The
three largest U.S. suppliers of foodservice disposables account for a significant percentage of the industry. As of 2012, Dart
Container Corporation, Reynolds Group/Pactiv and Georgia-Pacific collectively held approximately 29% of the U.S. market share
in the foodservice disposables industry. The overall industry consists of a small number of competitors, with approximately 50%
of our market controlled by the top 10 companies in the industry.
Concentration
in the foodservice disposables industry varies widely within specific market segments, with some segments dominated by a small
number of producers. For example, Dart Container is the leading supplier of plastic foodservice beverage cups, followed by Pactiv
and Berry Plastics. By contrast, the market for cutlery is more fragmented, with a growing portion of the market supplied by contract
manufacturers in China.
Nevertheless,
we may be unable to compete effectively against such larger, better-capitalized companies, which have well-established, long-term
relationships with the large customers we serve and seek to serve.
We
are subject to risks related to our dependence on the strength of restaurant, retail and commercial sectors of the economy in
various parts of the world.
Our
business depends on the strength of the restaurant, retail and commercial sectors of the economy in various parts of the world,
primarily in North America, and to a lesser extent Europe, Canada, Central and South America, the Middle East, Africa, and China.
These sectors of the economy are affected primarily by factors such as consumer demand and the condition of the retail industry,
which, in turn, are affected by general economic conditions. Challenging economic conditions in our target markets may exert considerable
pressure on consumer demand, and the resulting impact on consumer spending may have an adverse effect on demand for our products,
as well as our financial condition and results of operations.
Our
projections and assumptions underlying may be inaccurate, resulting in slower than anticipated growth.
All
statements, except historical data, are forward-looking statements. Although we believe the projections in these forward-looking
statements are reasonable, we cannot guarantee these projections will happen. Our operational results in the future may be different
from our estimates for many reasons, including but not limited to the oil price (our products are by-products of oil, so we are
heavily impacted by oil price), shrinking fast food industry production caused by increased production cost and changed consumption
habits of food industry, failure to grow capacity and capacity utilization as quickly as anticipated or at all, losing or failing
to secure customers and customer orders, shutdown of important clients, and replacement of plastics industry by paper and wood
products industry.
Our
plans to continue to improve productivity and reduce costs may not be successful, which would adversely affect our ability to
compete.
Our
success depends on our ability to continually improve our manufacturing operations to gain efficiencies, reduce supply chain costs
and streamline selling, general and administrative expenses in order to produce products that are reasonably priced, while still
allowing our Company to invest in innovation.
In
particular, we are in the midst of setting up a factory in Mexico by using the maquiladora (shelter) structure. Our goal is to
manufacture in this facility certain products that are not efficient to manufacture in U.S. or are subject to high tariffs if
being manufactured in and shipped from China. This project may not be completed completely as planned, may be more costly to implement
than expected, may have delays in implementation, or may not result in, in full or in part, the savings and other benefits anticipated.
In addition, such initiatives require the Company to implement a significant amount of organizational changes, which could have
a negative impact on employee engagement, divert management’s attention from other concerns, and if not properly managed,
impact the Company’s ability to retain key employees, cause disruptions in the Company’s day-to-day operations and
have a negative impact on the Company’s financial results.
Price
increases in raw materials and sourced products could harm the Company’s financial results.
Our
primary raw materials are (1) plastic resin (primarily polypropylene (“PP”), polystyrene (“PS”) which
includes General Purpose Polystyrene (“GPPS”) and High Impact Polystyrene (“HIPS”), and polyethylene terephthalate
(“PET”)), (2) plastic bags and membranes for packaging cutlery, (3) shipping cartons, (4) plastic colorants, (5) paper
board for paper straws, (6) paper napkins, salt, pepper and wet wipes for inclusion in cutlery packages and (7) labeling materials.
These raw materials are subject to price volatility and inflationary pressures. Our success is dependent, in part, on our continued
ability to reduce our exposure to increases in those costs through a variety of programs, including sales price adjustments based
on adjustments in such raw material costs, while maintaining and improving margins and market share. We also rely on third-party
manufacturers as a source for our products. These manufacturers are also subject to price volatility and labor cost and other
inflationary pressures, which may, in turn, result in an increase in the amount we pay for sourced products. Raw material and
sourced product price increases may more than offset our productivity gains and price increases and may adversely impact the Company’s
financial results.
Our
reliance on third party logistics providers may put us at risk of service failures for our customers.
Although
some of our larger competitors have integrated logistics and delivery service companies, we rely on third parties to ship our
products from China to our customers. Even after completing installation of the production lines in our Allentown facility, we
continue to rely on third parties for transportation within the United States. One of the bases on which we compete (particularly
with regard to our QSR customers) is service. To the extent we are unable to meet their demand for products or do not deliver
products on time, we stand a substantial risk of losing key accounts. Because we rely on third parties for logistics services,
we may be unable to avoid supply chain failures, even if we are able to meet our manufacturing obligations to customers.
If
we fail to protect our intellectual property rights, it could harm our business and competitive position.
We
rely on a combination of patent, trademark, domain name and trade secret laws and non-disclosure agreements and other methods
to protect our intellectual property rights. We own patents in China and U.S. covering our designs and production technology.
The
process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being
issued, and our existing and future patents may be insufficient to provide us with meaningful protection or commercial advantage.
Our patents and patent applications may also be challenged, invalidated or circumvented.
We
also rely on trade secret rights to protect our business through non-disclosure provisions in employment agreements with employees.
If our employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may
become known to our competitors.
Implementation
of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and
enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective
as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult
and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability,
scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation,
if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and
competitive position.
Our
Chinese patents and registered marks may not be protected outside of China due to territorial limitations on enforceability.
In
general, patent and trademark rights have territorial limitations in law and are valid only within the countries in which they
are registered.
At
present, Chinese enterprises may register their trademarks overseas through two methods. One is to file an application for trademark
registration in each single country or region in which protection is desired, while the other is to apply via the Madrid system
for international trademark registration. By the second way, under the provisions of the Madrid Agreement concerning the International
Registration of Marks (the “Madrid Agreement”) or the Protocol Relating to the Madrid Agreement concerning the International
Registration of Marks (the “Madrid Protocol”), applicants may designate their marks in one or more member countries
via the Madrid system for international registration.
As
of the date of the filing, we have registered one trademark at the International Bureau of the World Intellectual Property Organization
(“WIPO”) under the Madrid Agreement and Protocol. We have also applied for territorial extension by designating 15
member countries through WIPO. Currently the registration for this trademark is valid in 13 foreign member countries, including
the U.S.
Similar
with trademarks, Chinese enterprises may also register their patents overseas through two methods. One is to file an application
for patent registration in each single country or region, and the other is to file international application with the China Intellectual
Property Office or the International Bureau of World Intellectual Property Organization under the Patent Cooperation Treaty. However,
such international application may relate to invention or utility model patents, but does not include industrial design patents.
As
of the date of the filing, we have registered two design patents at the United States Patent and Trademark Office. This registration
is only valid in the U.S. For more details, please see the disclosure of our patents.
Currently,
most of our patents and trademarks are registered in China. If we do not register them in other jurisdictions, they may not be
protected outside of China. As a result, our business and competitive position could be harmed.
We
may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our
business and have a material adverse effect on our financial condition and results of operations.
Our
success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual
property rights. If we sell our branded products internationally, and as litigation becomes more common in China, we face a higher
risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’
proprietary rights. Our current or potential competitors, many of which have substantial resources and have made substantial investments
in competing technologies, may have or may obtain patents that will prevent, limit or interfere with our ability to make, use
or sell our branded products in either China or other countries, including the United States and other countries in Asia. The
validity and scope of claims relating to patents in our industry involve complex scientific, legal and factual questions and analysis
and, as a result, may be highly uncertain. In addition, the defense of intellectual property suits, including patent infringement
suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the
efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation
or proceedings to which we may become a party could cause us to:
|
●
|
pay
damage awards;
|
|
|
|
|
●
|
seek
licenses from third parties;
|
|
|
|
|
●
|
pay
ongoing royalties;
|
|
|
|
|
●
|
redesign
our branded products; or
|
|
|
|
|
●
|
be
restricted by injunctions,
|
each
of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers
deferring or limiting their purchase or use of our products, which could have a material adverse effect on our financial condition
and results of operations.
Outstanding
bank loans may reduce our available funds.
We
have approximately $27.1 million in outstanding bank loans as of December 31, 2018. The loans are held at multiple banks and entities
and are secured by some of our land and property in China and the U.S. as the collateral for the debt. While we believe we have
adequate capital to repay these bank loans at present, there can be no guarantee that we will be able to pay all amounts when
due or to refinance the amounts on terms that are acceptable to us or at all. If we are unable to make our payments when due or
to refinance such amounts, our property could be foreclosed and our business could be negatively affected.
While
we do not believe they will impact our liquidity, the terms of the debt agreements impose significant operating and financial
restrictions on us. These restrictions could also have a negative impact on our business, financial condition and results of operations
by significantly limiting or prohibiting us from engaging in certain transactions, including but not limited to: incurring or
guaranteeing additional indebtedness; transferring or selling assets currently held by us; and transferring ownership interests
in certain of our subsidiaries. The failure to comply with any of these covenants could cause a default under our other debt agreements.
Any of these defaults, if not waived, could result in the acceleration of all of our debt, in which case the debt would become
immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it on
favorable terms, if any.
We
may be unable to refinance our short-term loans.
We
expect to be able to refinance its short-term loans based on past experience and our good credit history. We do not believe failure
to refinance from certain banks will have significant negative impact on our normal business operations. Our related parties including
our major shareholders and affiliate companies are willing to provide us financial support. Although our operating cash flow was
positive in 2018, 2017 and 2016, it is possible for us to have negative cash flow in the future, and for our related parties to
be unable or unwilling to provide us financial support as needed. As a result, the failure to refinance our short-term loans could
potentially affect our capital expenditure and expansion of business.
If
the value of our property decreases, we may not be able to refinance our current debt.
All
of our current debt is secured by either mortgages on our real and other business property or guarantees by some of our shareholders.
If the value of our real property decreases, we may find that banks are unwilling to loan money to us secured by our business
property. A drop in property value could also prevent us from being able to refinance that loan when it becomes due on acceptable
terms or at all.
We
may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional
financing when needed.
We
may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking
additional financing in the immediate future, any additional equity may result in dilution to the holders of our outstanding shares
of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such
as conditions that:
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●
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limit
our ability to pay dividends or require us to seek consent for the payment of dividends;
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●
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increase
our vulnerability to general adverse economic and industry conditions;
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|
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●
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require
us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our
cash flow to fund capital expenditures, working capital and other general corporate purposes; and
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●
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limit
our flexibility in planning for, or reacting to, changes in our business and our industry.
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We
cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
The
loss of any of our key customers could reduce our revenues and our profitability.
Our
key customers are principally multinational QSRs, third party distributors, and retail stores, mainly located in the U.S. For
the year ended December 31, 2018, sales to our ten largest customers amounted in the aggregate to approximately 51.9% of our total
revenue. For the year ended December 31, 2017, sales to our ten largest customers amounted in the aggregate to approximately 53.6%
of our total revenue. For the year ended December 31, 2016, sales to our ten largest customers amounted in the aggregate to approximately
54.0% of our total revenue. There can be no assurance that we will maintain or improve the relationships with these customers,
or that we will be able to continue to supply these customers at current levels or at all. Any failure to pay by these customers
could have a material negative effect on our company’s business. In addition, having a relatively small number of customers
may cause our quarterly results to be inconsistent, depending upon when these customers pay for outstanding invoices.
During
the years ended December 31, 2018, 2017 and 2016, respectively, we had zero, one and one customer that accounted for 10% or more
of our revenues.
Customer
Name
|
|
Year
Ended
December 31,
2018
|
|
|
Year
Ended
December 31,
2017
|
|
|
Year
Ended
December 31,
2016
|
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Lollicup USA Inc.
|
|
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*
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%
|
|
|
11.6
|
%
|
|
|
13.0
|
%
|
*
|
Less than 10% during the period.
|
If
we cannot maintain long-term relationships with these major customers, the loss of our sales to them could have an adverse effect
on our business, financial condition and results of operations.
We
buy our supplies from a relatively limited number of suppliers.
During
the year ended December 31, 2018, our ten largest suppliers accounted for approximately 48.9% of our total purchases. During the
year ended December 31, 2017, our ten largest suppliers accounted for approximately 57.9% of our total purchases. During the year
ended December 31, 2016, our four largest suppliers accounted for approximately 60% of our total purchases. During the years ended
December 31, 2018, 2017 and 2016, respectively, we had one, two and three suppliers that accounted for 10% or more of our purchases.
Supplier
Name
|
|
Year
Ended December 31,
2018
|
|
|
Year
Ended December 31,
2017
|
|
|
Year
Ended December 31,
2016
|
|
Brilliance Resources Company
Limited
|
|
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*
|
%
|
|
|
*
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%
|
|
|
22.0
|
%
|
Koco Group Ltd
|
|
|
*
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%
|
|
|
11.2
|
%
|
|
|
13.2
|
|
Grand Chemical Group
|
|
|
12.0
|
%
|
|
|
12.4
|
%
|
|
|
19.1
|
%
|
*
|
Less
than 10% during the period.
|
Because
we purchase a material amount of our raw materials from these suppliers, the loss of any such suppliers could result in increased
expenses for our company and result in adverse impact on our business, financial condition and results of operations.
Our
bank accounts are not fully insured or protected against loss.
We
maintain our cash with various banks located in mainland China, Hong Kong and the United States. Our cash accounts in the PRC
are not insured or otherwise protected. To the extent our U.S. and Hong Kong accounts were to exceed statutory amounts, they would
also not be fully protected against loss. Should any bank or trust company holding our cash deposits become insolvent, or if we
are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.
We
are substantially dependent upon our senior management and key research and development personnel.
We
are highly dependent on our senior management to manage our business and operations and our key research and development personnel
for the development of new products and the enhancement of our existing products and technologies. In particular, we rely substantially
on our Chief Executive Officer, Mr. Xinfu Hu, and our Chief Operating Officer and Chair, Ms. Guilan Jiang, to manage our operations.
Ms. Jiang and Mr. Hu are husband and wife and have been involved in the plastic industry for more than twenty years. Due to their
experience in the industry and long relationships with our customer base, they would be difficult to replace.
While
we provide the legally required personal insurance for the benefit of our employees, we do not maintain key person life insurance
on any of our senior management or key personnel. The loss of any one of them would have a material adverse effect on our business
and operations. Competition for senior management and our other key personnel is intense, and the pool of suitable candidates
is limited. We may be unable to quickly locate a suitable replacement for any senior management or key personnel that we lose.
In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may
compete with us for customers, business partners and other key professionals and staff members of our company. Although each of
our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with his employment
with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between
us and any member of our senior management or key personnel.
In
our efforts to develop new products and methods of manufacturing, we compete for qualified personnel with technology companies
and research institutions. Intense competition for these personnel could cause our compensation costs to increase, which could
have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in
part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel.
If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.
Failure
to manage our growth could strain our management, operational and other resources, which could materially and adversely affect
our business and prospects.
Our
growth strategy includes increasing market penetration of our existing products, developing new products and increasing the number
and size of customers we serve. Pursuing these strategies has resulted in, and will continue to result in substantial demands
on management resources. In particular, the management of our growth will require, among other things:
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continued
enhancement of our research and development capabilities;
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stringent
cost controls and sufficient liquidity;
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strengthening
of financial and management controls;
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increased
marketing, sales and support activities; and
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●
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hiring
and training of new personnel.
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If
we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.
Risks
Related to Doing Business in China and Mexico
We
are new to the Mexican legal system and the unfamiliarity could adversely affect us.
We
plan to start production in Mexico by cooperating with a local shelter services company. The production and the operation is governed
by Mexican law which we barely have any knowledge. Although the shelter service company is obligated to handle essentially all
of the legal and compliance matters for us, we cannot guarantee that it will handle those matters correctly. The lack of knowledge
to the local law may cause noncompliance or breach of contracts and could adversely affect us and make us lose all of our investment
there.
Labor
laws in the PRC may adversely affect our results of operations.
On
June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, which became effective on January 1, 2008. The
Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision
to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide
to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes
in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely
affecting our financial condition and results of operations.
Under
the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC shareholders.
China
passed the Enterprise Income Tax Law, or the EIT Law, and it is implementing rules, both of which became effective on January
1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China
is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise
for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and
overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On
April 22, 2009, the State Administration of Taxation of China, or the SAT, issued the Circular Concerning Relevant Issues Regarding
Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of
de facto Management Bodies, or the SAT Notice 82, further interpreting the application of the EIT Law and its implementation to
offshore entities controlled by a Chinese enterprise or enterprise group. Pursuant to the SAT Notice 82, an enterprise incorporated
in an offshore jurisdiction and controlled by a Chinese enterprise or enterprise group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties
mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial
assets and properties, accounting books, corporate stamps, board and shareholder minutes are kept in China; and (iv) at least
half of its directors with voting rights or senior management often resident in China. After SAT Notice 82, the SAT issued a bulletin,
known as SAT Bulletin 45, which took effect on September 1, 2011, to provide more guidance on the implementation of SAT Notice
82 and clarify the reporting and filing obligations of such “non-domestically incorporated resident enterprise.” SAT
Bulletin 45 provides procedures and administrative details for the determination of resident status and administration on post-determination
matters. On January 29, 2014, the SAT issued Announcement of the State Administration of Taxation on Recognizing Resident Enterprises
Based on the Criteria of de facto Management Bodies, to further clarify the reporting and filing procedure for offshore entities
controlled by a Chinese enterprise or enterprise group and recognized as a resident enterprise.
The
determining criteria set forth in SAT Notice 82 and SAT Bulletin 45 may reflect the SAT’s general position on how the “de
facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless
of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals. If the PRC tax authorities
determine that FGI or its subsidiaries is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable
PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable
income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China
source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income,
as we complete our sales, including export sales, in China. Second, under the EIT Law and its implementing rules, dividends paid
to us from our PRC subsidiaries would be deemed as “qualified investment income between resident enterprises” and
therefore qualify as “tax-exempt income” pursuant to the clause 26 of the EIT Law. Finally, it is possible that future
guidance issued with respect to the new “resident enterprise” classification could result in a situation in which
the dividends we pay with respect to our ordinary shares, or the gain our non-PRC stockholders may realize from the transfer of
our ordinary shares, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC withholding tax. If we are
required under the EIT Law and its implementing regulations to withhold PRC income tax on dividends payable to our non-PRC stockholders,
or if non-PRC stockholders are required to pay PRC income tax on gains on the transfer of their shares of ordinary shares, our
business could be negatively impacted and the value of your investment may be materially reduced. Further, if we were treated
as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both China and such countries
in which we have taxable income, and our PRC tax may not be creditable against such other taxes.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.
We
are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or
offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by
the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly
prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China,
which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one
of the employees, consultants or distributors of our company, because these parties are not always subject to our control. We
are in process of implementing an anticorruption program, which prohibits the offering or giving of anything of value to foreign
officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires
that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants and
distributors and that they certify their compliance with our policy annually. It further requires that all hospitality involving
promotion of sales to foreign governments and government-owned or controlled entities be in accordance with specified guidelines.
In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption
laws.
However,
our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors
of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption
laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect
our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor
liability FCPA violations committed by companies in which we invest or that we acquire.
Uncertainties
with respect to the PRC legal system could adversely affect us.
We
conduct a substantial amount of our business through our subsidiaries in China. Our operations in China are governed by PRC laws
and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China
and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes.
Prior court decisions may be cited for reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments
in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently
cover all aspects of economic activities in China. In particular, because some of these laws and regulations are relatively new,
and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these
laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal
rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not
be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China
may be protracted and result in substantial costs and diversion of resources and management attention.
Governmental
control of currency conversion may affect the value of your investment.
The
PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. FGI receives revenues and purchases raw materials primarily in U.S. dollars but incurs other expenses
primarily in RMB. Although our main suppliers are based in mainland China or based in Hong Kong with Chinese operating subsidiaries,
some of them provide quotations in U.S. dollars. We choose quotations based on price competitiveness. In the past, U.S. dollars
quotations were more competitive so we purchase almost all of our raw materials in U.S. dollars. However, recently several RMB
quotations were more competitive and we accepted them and paid in RMB.
Under
our current corporate structure, FGI’s income is primarily derived from dividend payments from our PRC subsidiaries. Shortages
in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency
to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures
from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The
PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.
If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands,
we may not be able to pay dividends in foreign currencies to our security-holders.
We
are a holding company and we rely for funding on dividend payments from our subsidiaries, which are subject to restrictions under
PRC laws.
We
are a holding company incorporated in the Cayman Islands, and we operate our core businesses through our subsidiaries in the PRC
and the United States. Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness
depends upon dividends received from these PRC subsidiaries. If our subsidiaries incur debt or losses, their ability to pay dividends
or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will be
restricted. PRC laws require that dividends be paid only out of the after-tax profit of our PRC subsidiaries calculated according
to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions.
PRC laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These
statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities
or other agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries
to pay dividends to us. These restrictions on the availability of our funding may impact our ability to pay dividends to our shareholders
and to service our indebtedness.
Our
business may be materially and adversely affected if any of our PRC subsidiaries declare bankruptcy or become subject to a dissolution
or liquidation proceeding.
The
Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that
an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s
assets are, or are demonstrably, insufficient to clear such debts.
Our
PRC subsidiaries hold certain assets that are important to our business operations. If any of our PRC subsidiaries undergoes a
voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets,
thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition
and results of operations.
According
to the SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange
Administration Policies for Direct Investment, effective on December 17, 2012, and the Provisions for Administration of Foreign
Exchange Relating to Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if any of our PRC subsidiaries undergoes
a voluntary or involuntary liquidation proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders
abroad is no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear
whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE and
its relevant branches in the past.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
Changes
in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes
in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect
on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example,
to the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar
would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into
U.S. dollars for the purpose of paying dividends on our Ordinary Shares or for other business purposes, appreciation of the U.S.
dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the
RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness
of our products against products of foreign manufacturers or products relying on foreign inputs.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
We
reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other
comprehensive income (loss).” For year ended December 31, 2018, we had a negative adjustment of $3,147,531 for foreign currency
translations. For year ended December 31, 2017, we had a positive adjustment of $2,172,347 for foreign currency translations.
For years ended December 31, 2016, we had a negative adjustment of $1,913,200 for foreign currency translations. Very limited
hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we
may have to expend significant resources to investigate and resolve the matter which could harm our business operations and our
reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved
favorably.
Recently,
U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism
and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism
and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over
financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations
of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject
to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations.
It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company and our business.
If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have
to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction
to our management. If such allegations are not proven to be groundless, our company and business operations will be severely hampered
and your investment in our shares could be rendered worthless.
PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident
shareholders to penalties and limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability
to distribute profits to us, or otherwise adversely affect us.
The
SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register
with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose
of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the
offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such
PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares,
or mergers or divisions.
SAFE
Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging
in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.
If
our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary
may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to
us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply
with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange
restrictions.
Ms.
Jiang has completed her SAFE Circular 37 registration. Ms. Sujuan Zhu, Mr. Qian Hu, Mr. Xinzhong Wang, Mr. Jinxue Jiang and Mr.
Yongjun Guo have applied to SAFE’s local branch in Taizhou for registration, but we cannot provide any assurances that such
registration will be completed in a timely manner. Moreover, we may not be fully informed of the identities of all our beneficial
owners who are PRC citizens or residents, and we cannot compel our beneficial owners to comply with SAFE registration requirements.
As
a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC citizens or residents have complied
with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by
such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations
of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely
affect our business and prospects.
Risks
Related to Our Corporate Structure and Operation
We
incur additional costs as a public company, which could negatively impact our net income and liquidity.
We
are a public company in the United States. As a public company, we incur significant legal, accounting and other expenses that
we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules and regulations implemented by the SEC and
The Nasdaq Capital Market require significantly heightened corporate governance practices for public companies. We expect that
these rules and regulations to increase our legal, accounting and financial compliance costs and make many corporate activities
more time-consuming and costly.
We
do not expect to incur materially greater costs as a public company than those incurred by similarly sized foreign private issuers.
If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors
may lose confidence in us and the market price of our Ordinary Shares could decline.
Entities
controlled by our employees, officers and/or directors control a majority of our Ordinary Shares, decreasing your influence on
shareholder decisions.
Entities
controlled by our employees, officers and/or directors, in the aggregate, continue to own a majority of our outstanding shares.
As a result, our employees, officers and directors possess substantial ability to impact our management and affairs and the outcome
of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert control
and substantial influence over matters such as electing directors and approving mergers or other business combination transactions.
This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which
could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might
reduce the price of our Ordinary Shares. These actions may be taken even if they are opposed by our other shareholders. See “MAJOR
SHAREHOLDERS.”
The
obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.
We
are a publicly listed company in the United States. As a publicly listed company, we are required to file periodic reports with
the Securities and Exchange Commission upon the occurrence of matters that are material to our company and shareholders. In some
cases, we need to disclose material agreements or results of financial operations that we would not be required to disclose if
we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may
give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we are governed by U.S. laws that
our non-publicly traded competitors are not required to follow. To the extent compliance with U.S. laws increases our expenses
or decreases our competitiveness against such companies, our public listing could affect our results of operations.
We
are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies.
As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at
different times, which may make it more difficult for you to evaluate our performance and prospects.
We
are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the
Exchange Act, we are subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S.
domestic reporting companies. For example, we are not required to issue quarterly reports or proxy statements. We are not required
to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers are not
required to report equity holdings under Section 16 of the Exchange Act and are not subject to the insider short-swing profit
disclosure and recovery regime.
As
a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant
to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However,
we are still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since
many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting
companies, you should not expect to receive the same information about us and at the same time as the information provided by
U.S. domestic reporting companies.
As
a foreign private issuer, we are permitted to rely on exemptions from certain Nasdaq corporate governance standards applicable
to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. If
we opt to rely on such exemptions in the future, such decision might afford less protection to holders of our ordinary shares.
Section
5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members
to be independent, and Section 5605(d) and 5605(e) require listed companies to have independent director oversight of executive
compensation and nomination of directors. As a foreign private issuer, however, we are permitted to follow home country practice
in lieu of the above requirements. We agreed with our underwriters that we do not opt to follow home country practice in lieu
of such requirements for two years after the completion of our initial public offering. See “Item 16.G. Corporate Governance.”
As this period has passed, we can decide to follow home country practice and our board of directors could make such a decision
to depart from such requirements by ordinary resolution. The remainder of this risk factor, therefore, discusses risks to shareholders
in the event the board of directors were to depart from some of such Nasdaq requirements and instead follow home country practices.
The
corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of
independent directors or the implementation of a nominating and corporate governance committee. Since a majority of our board
of directors would not consist of independent directors if we relied on the foreign private issuer exemption, fewer board members
would be exercising independent judgment and the level of board oversight on the management of our company might decrease as a
result. In addition, we could opt to follow Cayman Islands law instead of the Nasdaq requirements that mandate that we obtain
shareholder approval for certain dilutive events, such as an issuance that will result in a change of control, certain transactions
other than a public offering involving issuances of 20% or greater interests in the company and certain acquisitions of the shares
or assets of another company. For a description of the material corporate governance differences between the Nasdaq requirements
and Cayman Islands law, see “Description of Share Capital — Differences in Corporate Law” in our registration
statement on Form F-1 (File no. 333-205894), filed with the SEC on July 28, 2015, as amended.
Our
directors’ and executive officers’ other business activities may pose conflicts of interest.
Our
directors and executive officers may have other business interests outside the company from time to time that could potentially
give rise to conflicts of interest. For example, our Chief Operating Officer and Chair, Guilan Jiang, previously owned 50% of
Wenling Fulin Plastic Products Co. Ltd. Ms. Jiang was also its legal representative and general manager. Wenling Fulin Plastic
Products Co. Ltd. is a holding company with no investment in any competing business with us, although it has investment in a local
commercial bank and leases its land to a restaurant. While the company was previously in our industry, this privately held company’s
operations, but not the name, have changed. Notwithstanding the foregoing, if this company were to begin to operate within our
industry and Ms. Jiang operates this company again, we might find a conflict of interest.
Although
her business working time at this company is flexible, Ms. Jiang historically devoted very limited time to matters concerning
Wenling Fulin Plastic Products Co. Ltd., and most of her time to matters for FGI. If Ms. Jiang devotes any significant time and
effort to her other companies in the future, such business activities could both distract her from focusing on FGI and pose a
conflict of interest to the extent her activities at any other companies compete with our company.
An
insufficient amount of insurance could expose us to significant costs and business disruption.
While
we have purchased insurance to cover certain assets and property of our business, the amounts and scope of coverage could leave
our business inadequately protected from loss. For example, not all of our subsidiaries have coverage of business interruption
insurance. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents
or business interruption, our results of operations could be materially and adversely affected.
We
may have additional tax liabilities and the recent changes to the U.S. tax law could adversely affect our tax obligations and
operating results.
We
are a multinational company subject to tax in several U.S. and foreign tax jurisdictions. Significant judgment is required in
determining our tax provision for income taxes and evaluating our tax positions on a consolidated basis. We believe our tax positions
are consistent with the tax laws in the jurisdictions in which we conduct our business. Should any tax authority disagree with
our judgement or estimates and impose any additional tax liabilities on us, it could adversely impact our results of operations
and financial position.
On
December 22, 2017, the U.S. enacted tax reform through the Tax Cuts and Jobs Act of 2017 (the “Act”), and the Act
made significant changes to U.S. income tax law including the manner in which the U.S. imposes income tax on multinational corporations.
The U.S. Department of Treasury, the Internal Revenue Service and other standard-setting bodies have authority to issue regulations
or interpretative guidance that may impact how we apply the law and impact our results of operations in the period issued and
subsequently. Based on our understanding of the Act and guidance available as of the date of this filing, we have determined that
there was no significant income tax impact derived from the Act for our 2018 taxable year and on the tax amounts reported in our
2018 financial statements. As additional regulatory guidance is issued, and as we gain better understanding of the operation of
the relevant rules, our analysis and conclusion may be different from our current assessments, which could materially affect our
results of operations and financial position.
Risks
Related to Ownership of Our Ordinary Shares
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our Ordinary Shares less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long
as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that
are applicable to other public companies that are not emerging growth companies, including not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation
and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for
up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1.07 billion
in non-convertible debt in a three year period, or if the market value of our Ordinary Shares held by non-affiliates exceeds $700
million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following
December 31. We cannot predict if investors will find our Ordinary Shares less attractive because we may rely on these exemptions.
If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary
Shares and our share price may be more volatile.
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting
standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging
growth companies.
If
we are unable to maintain effective internal control over financial reporting in the future, and we may fail to detect errors
in reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our
Ordinary Shares may decline.
As
a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses
in such internal control. In addition, we are required to furnish a report by management on the effectiveness of our internal
control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We have completed our design of internal controls
over financial reporting; and we have improved our internal controls by performing the adjustment entries before our auditor suggest
them. However, we failed to engage our external financial consultant to conduct in-person field work for the financial reporting
for the year ended December 31, 2018 and our independent auditors proposed a number of significant adjustments. Please see the
material weakness in our internal controls discussed on page 96. In addition, our independent registered public accounting firm
is required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on
Form 20-F following the date on which we are no longer an “emerging growth company,” which may be up to five full
years following the date of our initial public offering. If we identify material weaknesses in our internal control over financial
reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control
over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion
as to the effectiveness of our internal control over financial reporting when required, we may fail to detect errors in a timely
fashion and investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our
Ordinary Shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our
securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require
additional financial and management resources.
The
requirements of being a public company may strain our resources and divert management’s attention.
As
a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other
applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules
and regulations nonetheless increases our legal and financial compliance costs, makes some activities more difficult, time-consuming
or costly and increases demand on our systems and resources, particularly after we are no longer an “emerging growth company.”
The Exchange Act requires, among other things, that we file annual and current reports with respect to our business and operating
results. In addition, as long as we are listed on The Nasdaq Capital Market, we are also required to file semi-annual financial
statements.
As
a result of disclosure of information in this annual report and in filings required of a public company, our business and financial
condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and
other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims
do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them,
could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.
We
also expect that being a public company and these rules and regulations make it more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage.
These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly
to serve on our audit committee and compensation committee, and qualified executive officers.
The
market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be
able to resell your shares at or above the price you paid.
The trading price for our Ordinary Shares has
fluctuated since we first listed our Ordinary Shares. Since our Ordinary Shares became listed on the Nasdaq on November 4, 2015,
the trading price of our Ordinary Shares has ranged from US $6 to US $1.68 per common share, and the last reported trading price
on April 2, 2019 was $2.4 per Ordinary Share. The market price of our Ordinary Shares may fluctuate significantly in response
to numerous factors, many of which are beyond our control, including:
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actual
or anticipated fluctuations in our revenue and other operating results;
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the
financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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actions
of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts
who follow our company, or our failure to meet these estimates or the expectations of investors;
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announcements
by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships,
joint ventures, or capital commitments;
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price
and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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lawsuits
threatened or filed against us; and
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other
events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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In
addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action
litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us
to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
We
do not intend to pay dividends for the foreseeable future.
We
currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to
declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary
Shares if the market price of our Ordinary Shares increases.
We
are subject to liability risks stemming from our foreign status, which could make it more difficult for investors to sue or enforce
judgments against our company.
Most
of our operations and assets are located in the PRC. In addition, most of our executive officers and directors are non-residents
of the U.S., and much of the assets of such persons are located outside the U.S. As a result, it could be difficult for investors
to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
In
addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the
United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available
in respect to any such action, may result in the rights of shareholders of a Cayman Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to
them if they believe that corporate wrongdoing has occurred. The Cayman Islands courts are also unlikely to recognize or enforce
against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose
liabilities against us, in original actions brought in the Cayman Islands, based on certain liability provisions of U.S. securities
laws that are penal in nature. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States,
although the courts of the Cayman Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be
able to recover anything to make up for the losses suffered.
Lastly,
under the law of the Cayman Islands, there is little statutory law for the protection of minority shareholders. The principal
protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation,
our First Amended and Restated Memorandum and Articles of Association. Shareholders are entitled to have the affairs of the company
conducted in accordance with the general law and the articles and memorandum.
There
are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since
the common law of the Cayman Islands for business companies is limited. Under the general rule pursuant to English company law
known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence
of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority
or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according
to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded
the requirements of company law or the provisions of the company’s First Amended and Restated Memorandum and Articles of
Association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1)
an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the
majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the
personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring
approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders
under the laws of many states in the United States.
Our
board of directors may decline to register transfers of ordinary shares in certain circumstances.
Our
board of directors may, in its sole discretion, decline to register any transfer of any ordinary share which is not fully paid
up or on which we have a lien. Our directors may also decline to register any transfer of any share unless (i) the instrument
of transfer is lodged with us, accompanied by the certificate for the shares to which it relates and such other evidence as our
board of directors may reasonably require to show the right of the transferor to make the transfer; (ii) the instrument of transfer
is in respect of only one class of shares; (iii) the instrument of transfer is properly stamped, if required; (iv) in the case
of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; (v) the
shares conceded are free of any lien in favor of us; or (vi) a fee of such maximum sum as Nasdaq may determine to be payable,
or such lesser sum as our board of directors may from time to time require, is paid to us in respect thereof.
If
our directors refuse to register a transfer they shall, within one month after the date on which the instrument of transfer was
lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days’
notice being given by advertisement in such one or more newspapers or by electronic means, be suspended and the register closed
at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration
of transfers shall not be suspended nor the register closed for more than 30 days in any year.
You
may be unable to present proposals before general meetings or extraordinary general meetings not called by shareholders.
Cayman
Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders
with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles
of association. Our First Amended and Restated Articles of Association allow our shareholders holding shares representing in aggregate
not less than 20% of our voting share capital in issue, to requisition an extraordinary general meeting of our shareholders, in
which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting.
Although
our First Amended and Restated Articles of Association do not provide our shareholders with any right to put any proposals before
annual general meetings or extraordinary general meetings not called by such shareholders, any shareholder may submit a proposal
to our board of directors for consideration of inclusion in a proxy statement. Advance notice of at least ten calendar days is
required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders.
A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less
than one-third in nominal value of the total issued voting shares in our company.
Item 4.
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Information
on the Company
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A.
History and Development of the Company
Fuling
Global Inc. (“FGI”) was incorporated in the Cayman Islands on January 19, 2015. FGI has an indefinite term. FGI,
its subsidiaries and its variable interest entity (“VIE”) (collectively the “Company”) are
principally engaged in the production and distribution of environmentally-friendly plastic and paper serviceware in the
People’s Republic of China (“PRC” or “China”) and United States (“U.S.”). Most
products are exported to the U.S. and Europe and sold to major fast food chains and wholesalers.
The
address of FGI’s principal place of business is Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s
Republic of China 317511. FGI’s phone number is +86-576-86623058. We have appointed C T Corporation System (The Corporation
Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, DE 19801) as our agent to receive service of process
with respect to any action brought against us in the courts of the State of Delaware under the federal securities laws of the
United States or under the securities laws of the State of Delaware.
Taizhou
Fuling Plastics Co., Ltd. (“Taizhou Fuling”) was established on October 28, 1992 as a Sino-Foreign joint venture under
the laws of the People’s Republic of China (“China” or “PRC”) with initial registered capital of
$510,000.
On
April 26, 2004, Total Faith Holdings Limited (“Total Faith”) was incorporated in British Virgin Islands.
In
May 2005, Total Faith became one of Taizhou Fuling’s shareholders. The other shareholder was Wenling County Songmen Plastic
Co., Ltd. (“Wenling Songmen”). In the same month, Wenling Songmen and Total Faith added $846,300 and $289,700, respectively,
to the registered capital of Taizhou Fuling.
In
December 2005, Taizhou Fuling changed its name to Zhejiang Fuling Plastic Co., Ltd. Wenling Songmen and Total Faith added $745,000
and $255,000, respectively, to the registered capital.
In
November 2006, Taizhou Fuling changed its name from Zhejiang Fuling Plastic Co., Ltd. to Taizhou Fuling Plastics Co., Ltd. and
extended its term from 15 years to 25 years. In July 2015, Taizhou Fuling extended its term from 25 years to 45 years. Therefore,
its term is from October 28, 1992 to October 27, 2037.
In
November 2007, Wenling Songmen and Total Faith added $670,500 and $229,500, respectively, to the registered capital.
On
March 12, 2009, Wenling Songmen, one of Taizhou Fuling’s two investors, changed its name to Wenling Fulin Plastic Products
Co. Ltd.
In
May 2014, Total Faith added $7,530,000 of registered capital to Taizhou Fuling. Wenling Songmen waived its right to add registered
capital. As a result, Total Faith and Wenling Songmen held 76% and 24%, respectively, of the equity interests in Taizhou Fuling
at the time. The total registered capital was increased to $11,110,000.
On
May 28, 2014, Total Faith acquired Wenling Songmen’s 24% interest in Taizhou Fuling for RMB 29 million, which was funded
by a loan from Wenling Songmen for RMB 12.6 million and capital investment from Ms. Jiang for RMB 16.4 million. In compliance
with Chinese business regulations, in order to update business registration with State Administration for Industry and Commerce,
the consideration should be determined based on “fair value” of the interest transferred, which was determined to
be RMB 29 million, compared to RMB 16.4 million, the registered capital owned by Wenling Songmen. Total Faith, Wenling Songmen
agreed that loan would be settled automatically after the RMB 12.6 million paid to Wenling Songmen, which is the excess to the
register capital. As a result of the acquisition, Taizhou Fuling changed its entity type from a Sino-Foreign joint venture to
a wholly foreign owned enterprise (“WFOE”). Taizhou Fuling is now 100% owned by Total Faith.
Taizhou
Fuling has three wholly-owned subsidiaries, Zhejiang Great Plastics Technology Co., Ltd. (“Great Plastics”), Fuling
Plastic USA, Inc. (“Fuling USA”), and Direct Link USA LLC (“Direct Link”).
Great
Plastics was incorporated in China in March 2010 and principally engaged in the production of drinking straws, cup and plate items.
Fuling USA was incorporated in the Commonwealth of Pennsylvania in 2014. Fuling USA is establishing the Company’s first
production factory in the U.S. and will principally engage in the production of cutlery and straw items. Direct Link was incorporated
in the State of Delaware in 2011. Great Plastics and Fuling USA serve as import trading companies of Taizhou Fuling in the United
States.
Prior
to the incorporation of Fuling USA, we incorporated a similarly-named wholly-owned subsidiary in New York named Fuling Plastics
USA Inc. (“Old Fuling USA”) in 2009. (Note that Fuling USA’s name is the singular Fuling Plastic, rather than
the plural Fuling Plastics.) Old Fuling USA served as a trading company that imported certain products from our China facilities
and sold them to our customers in the U.S. Since we incorporated Fuling USA in 2014 in Pennsylvania to coordinate our Allentown
project, we no longer needed to maintain Old Fuling USA and reduced its operations in January 2014. Old Fuling USA was dissolved
on April 8, 2015.
Total
Faith effectively controls Domo Industry Inc. (“Domo”), a U.S. company established in the State of New York in October
2007, based on the fact that Domo’s equity at risk is not sufficient to permit it to carry on its activities without additional
subordinated financial support from Total Faith. Total Faith is obligated to absorb a majority of the risk of loss from Domo’s
activities and to receive the majority of Domo’s residual returns. Based on this arrangement, Total Faith has gained effective
control over Domo and Domo is considered a Variable Interest Entity (“VIE”) under Accounting Standards Codification
(“ASC”) 810-10-05-08A. Accordingly, Total Faith consolidates Domo’s operating results, assets and liabilities.
On
January 9, 2015, Fuling USA transferred 100% of its interest in Direct Link to Taizhou Fuling, and Ms. Jiang transferred her 49%
interest in Domo to Total Faith, both in connection with the reorganization of our corporate structure in preparation for our
initial public offering. On February 19, 2015, Ms. Jiang transferred her interest in Total Faith, which is 100% of the equity
of Total Faith, to FGI. At the completion of these transactions, (i) Total Faith owns 49% of the equity of Domo but maintains
effective control; (ii) Taizhou Fuling owns 100% of the equity of Direct Link; (iii) FGI owns 100% of the equity of Total Faith;
and (iv) eight shareholders own 100% of the equity of FGI.
In
November 2015, we completed our initial public offering, in which we offered and sold an aggregate of 4,038,423 ordinary shares.
We received approximately US $20 million in proceeds before expenses. Our ordinary shares are listed on the Nasdaq under the symbol
“FORK.”
In
November 2015, Total Faith increased Taizhou Fuling’s registered capital from $11.11 million to $21.63 million.
In
September 2016, Taizhou Fuling established Wenling Changli Import and Export Co., Ltd. (“Wenling Changli”) in China.
Wenling Changli’s main business is to export materials from China to our Allentown facility.
In
November 2018, Great Plastics signed sales contracts (the “Contracts”) to sell the real properties previously used as
one of its manufacturing factories in China the “Sanmen Factory”) to Zhejiang Zhongye Packaging Technology Co. Ltd.,
an unrelated third party, for total cash consideration of RMB 40.2 million (approximately US$5.8 million). We have relocated almost
all of related machines and equipment to our new Wenling Factory. We plan to dissolve Great Plastics by September 2019 when we
expect certain administrative matters will be resolved.
We
are in the process of setting up manufacturing operation under the maquiladora model in Monterrey, Mexico (the “Mexico Factory”).
In December 2018, we signed a building lease with Interpuerto Industrial Park in Monterrey, Mexico and a service agreement with
a local shelter service company to help with administrative, accounting, compliance, import/export, human resources, etc., at
the Mexico Factory. The local shelter service company established a shelter company which is not legally owned by us. We signed
a maquila services agreement with this shelter company in January 2019 according to which the shelter company will operate the
factory. We pay for all the costs and expenses for the operation. In exchange the shelter company manufactures the products and
ship them to us for sales in the U.S. Factory renovating is expected to start in April 2019, followed by equipment installation
and testing and worker recruitment in May 2019. We expect that the first phase of the Mexico Factory will have an annual design
capacity of 10,000 tons and will be primarily used for producing plastic and paper straws and paper cups serving the U.S. market.
We expect to launch commercial production at the Mexico Factory by July 2019.
We
are in the process of constructing our Wenling factory and expanding our Allentown factory. Our Wenling factory is under the second
phase of the construction which is expected be completed in August 2019.
B.
Business Overview
We
have been in business since 1992. In the beginning, however, we did not produce the disposable serviceware products we produce
today. Instead, for our first 10 years, we sold plastic household articles, baskets and other plastic products mainly in Europe.
During this time, we were a relatively small company generating a few million dollars per year in revenue.
In
2003, the focus of our company changed dramatically. We met a company from Pennsylvania at the China Import and Export Fair in
2003, and they were looking for a supplier of disposable plastic serviceware products to serve one of their large customers. Although
we had not, at that time, ever produced cutlery of any type, we saw the opportunity to help this company, which had more than
70 years of operating history, meet its production requirements for a large customer.
Many
of our competitors turned away from an opportunity like this, since the production of disposable serviceware was seen as a low
profit venture. Although the profit margins were lower, the revenues were significantly higher, allowing us to reach revenues
of more than $10 million per year in 2003 and 2004.
Our
customer was pleased with the quality of our products, and we began to increase our production levels to meet the new demand.
There were, of course, some challenges along the way as we learned the requirements and increasing environmental sensitivities
of our new industry. For example, we were initially unprepared for the audits conducted by QSR chains when the customer’s
Shanghai branch first visited our factory. After failing that first inspection, we tirelessly worked to address all of the issues
noted and succeeded in passing the audit just seven short days later.
As
we increased our business supplying our first QSR chain, other customers sought us out to provide disposable serviceware products
as well. Continued growth raised our sales to approximately $20 million per year in 2008.
In
2009, we started to work directly with U.S. customers rather than through intermediaries. Although this decision has been an important
component of our long-term success, our orders temporarily decreased, affecting our sales during the period, as some distributors
sourced products from some of our competitors that lacked the ability to compete directly with such intermediaries.
We
saw these challenges as an opportunity to continue growing our business. We began our own research and development efforts to
differentiate our company from the numerous small Chinese factories that were capable of filling existing demand but lacked the
ability to develop new materials and production machines. We have also retained Mr. John Kunes, an experienced executive in the
U.S. plastic foodservice disposable industry, who was instrumental in helping us build direct relationships with QSR chains. Mr.
Kunes currently serves as an Executive Vice President of Fuling USA.
As
we have grown into a mature company in our industry, we have developed four main types of customers:
1.
Dealers
2.
QSRs
3.
Manufacturers
4.
Retailers
Our
Industry
Foodservice
Disposables — Generally
The
foodservice disposables industry is segmented into (1) packaging, (2) serviceware and (3) napkins and other disposables. According
to a 2013 report by the Freedonia Group, demand for the entire foodservice disposable industry is projected to reach $19.7 billion
by 2017, representing compound annual growth of 3.6% per year from 2012 sales of $16.5 billion. This projected growth rate is
based on a historical compound annual growth rate of 3.7% from 2007 through 2012. The industry projection consists of a blended
compound annual growth rate of 4.1% in packaging, 3.2% in serviceware and 2.2% in napkins and other disposables, compared with
historical compound annual growth rates of 4.1%, 3.5% and 2.3%, respectively, in the 2007 to 2012 period.
Serviceware
Segment
Our
products consist predominantly of serviceware, which includes cutlery, drinking straws, cups and plates. Approximately 45.5% of
foodservice disposable sales were for disposable serviceware:
(The
Freedonia Group, Inc.)
Serviceware
segment’s total revenues in 2012 were $7.5 billion, compared with $6.3 billion in 2007. By far, the largest component of
serviceware products is cups, including beverage cups and portion cups, which accounted for approximately 55% of demand in the
segment in 2012. According to 2014 polls conducted by Experian, nearly 65% of U.S. households use disposable cups and plates,
and of those who use such products, more participants said they use the store brand (26.5%) than the next highest brand preference
(20.1%). For companies like ours, which produce products under the brand names of our customers, the absence of strong brand loyalty
in our industry is positive news.
Demand
for serviceware has been driven by continued strength in QSR demand and the growth of limited service restaurants and retailer
in-store cafes and snack bars.
Raw
Materials in Foodservice Disposables Industry
Foodservice
disposables use a variety of materials, depending on the intended use of such disposables. Approximately 7.3 billion pounds of
raw materials were used in manufacturing foodservice disposables in 2012:
(The
Freedonia Group, Inc.)
Paper
products are commonly used for bags, soda and coffee cups, napkins and wrapping papers. Aluminum foil products are often found
in limited service restaurant take-out containers and foil/paper laminated wraps. Plastics (including a variety of polystyrene
(“PS”), polypropylene (“PP”), polyethylenes and degradable resins) are seen in utensils, straws, clamshell
containers, cups and container lids.
Plastics
have an important role in the foodservice disposables industry, due to their impressive range of appropriate uses: keeping food
hot, keeping food cold, low cost, light weight, water-tightness, clarity, flavor neutrality and malleability for different uses.
While
we believe we are able to produce products that can be used for a variety of uses, we also recognize that specific products may
be better suited for desired uses: for example, while we produce plastic drinking straws and are able to produce plastic wrappers
for such straws, our customers typically prefer that we obtain paper wrappers for the straws we provide to them, both for cost
reasons and also for safety reasons, as wet plastic wrappers may become pose accident risks on QSR floors.
Moreover,
even where plastic products are well suited to specific uses, consumer preferences may affect demand. For example, few materials
are better suited to keeping coffee warm (and avoiding burning the hands holding that coffee) than foamed polystyrene cups; however,
due to environmental concerns some QSRs and other customers have chosen paper cups and cardboard sleeves as an alternative to
foamed polystyrene. Indeed, some municipalities and states in the United States have proposed regulations that would prevent such
cups from being sold.
To
address these consumer requirements and to anticipate local ordinances, manufacturers like our company have researched and developed
environmentally-friendly alternatives to traditional plastic products. As of 2012, degradable products accounted for almost 2%
of the total foodservice disposables revenue in the United States. Cups and containers made up approximately 75% of that demand.
Degradable plastics consist primarily of starch-based plastics and polylactic acid (“PLA”).
Our
Products
While
a majority of our products purchased by our customers use the above-mentioned PP, PS including General Purpose Polystyrene (“GPPS”)
and High Impact Polystyrene (“HIPS”), and PET, we focused on developing more environmentally-friendly solutions in
order to continue to compete as our target markets’ environmental laws become more stringent. We have already seen products
like foamed polystyrene banned or heavily restricted in some of our target markets. We believe that by providing biodegradable
disposable food service items, we may find a competitive advantage over companies that produce only traditional, less environmentally-friendly
products.
In addition to plastic serviceware, we also
produce paper straws and paper cups. We have been manufacturing paper cups in our Songmen factory since 2017. In 2018, we launched
paper straw product after installing 35 paper straw production lines in our new Wenling factory.
We
have collaborated with the Technical Institute of Physics and Chemistry, Chinese Academy of Sciences in research regarding foodservice
disposables technology in materials, processes and systems. Under the terms of the Technology Development & Cooperation Contract
between Taizhou Fuling and Chinese Academy of Sciences, the right to apply for a patent of an invention or creation and the right
to use the know-how achieved in cooperative development shall be jointly owned by the parties thereto. Moreover, according the
PRC Contract Law, if the Chinese Academy of Sciences transfers the right to apply for a patent, Taizhou Fuling has the right of
first refusal under the same conditions.
It
is through these collaborations that we have secured important breakthroughs resulting in proprietary knowledge and patents. Currently
our research focuses on the latest biodegradable materials, including Polybutylene Succinate (“PBS”), PLA, and cellulose.
|
1.
|
PBS
is crystallized biodegradable polyester. As PBS decomposes naturally into water and carbon dioxide, it is a biodegradable
alternative to some common plastics. It is both a green and environmentally-friendly material. It has high mechanical performance,
good toughness, good thermal stability, and a wide range of processing temperature and high heat deflection temperature. PBS
can be processed by various molding ways with normal equipment. To meet the requirements of various products, it can be mixed
with other biodegradable or natural materials, such as PLA, polypropylene carbonate (“PPC”), polyhydroxyalkanoates
(“PHAs”), Polycaprolactone (“PCL”) and starch or wood powder.
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2.
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PLA
is a biodegradable thermoplastic aliphatic polyester derived from renewable resources, such as corn starch (in the United
States), tapioca roots, chips or starch (mostly in Asia), or sugarcane (in the rest of the world). In 2010, PLA had the second
highest consumption volume of any bioplastic of the world.
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3.
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Cellulose
is an organic compound. It is the most abundant organic polymer on Earth. Cellulose has no taste, is odorless, is insoluble
in water and most organic solvents and is biodegradable. Hydroxyl bonding of cellulose in water produces a sprayable, moldable
material as an alternative to the use of plastics.
|
Our
advanced R&D center in Wenling, Zhejiang aims to develop five new products every year. While our ability to maximize use of
biodegradable materials will ultimately hinge on customer demand, we seek to maximize the environmental friendliness of our products.
For a list of some of our recent research projects, see “BUSINESS — Research and Development.”
Our
Environmental Stewardship Measures
We
endeavor to increase our production of environmentally-friendly products and reduce pollution in the production process. We have
formulated various environmental manuals and policies, including
Environmental Targets
,
Environmental Measure Implementation
Plan
and
Environmental Training Management Procedure
. We also have founded an environmental management group whose
members have relevant environmental management qualifications and experience. We keep complete records of our clean production
files. We have implemented examination equipment for monitoring pollution and full operations records of our environmental protection
facility. We strictly comply with laws and regulations about environmental protection and comprehensive utilization of resources.
We have never been penalized by any environmental protection governmental agency.
We
have obtained several environmental stewardship-related certificates for our management systems that are listed in the following
table.
Fuling
Environmental Stewardship-related Certificates
Issuing
Authority
|
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Certificate
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Recipient
|
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Standard
|
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Applicable
to
|
|
Valid
Period
|
Beijing
Zhong-An-Zhi-Huan Certification Center
|
|
Environmental
Management System Certificate
|
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Taizhou
Fuling
|
|
GB/T
24001 — 2016/ISO 14001:2015
|
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Plastic
drinking cups and disposable plastic tableware production and service
|
|
2017-09-19
until 2020-09-13
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Beijing
Zhong-An-Zhi-Huan Certification Center
|
|
Environmental
Management System Certificate
|
|
Great
Plastics
|
|
GB/T
24001 — 2016/ISO 14001:2015
|
|
Production
and related activities of disposable plastic cutlery and plastic cups
|
|
2017-09-19
until 2020-09-13
|
Production
Strategy
Product
Mix
While
we will continue to improve our traditional serviceware segment offerings, we plan to grow our packaging segment. Our customers
in this segment are mainly retailers and wholesalers. We launched clamshell product in 2018 after installing one clamshell production
line in our new Wenling factory. While packaging materials currently constitute a small percentage of our sales revenue, we aim
to achieve significant growth in this segment. Our decision is based on following reasons:
(1)
Our packaging products have the same customer base as our serviceware products.
(2)
Several big cities including New York have discussed or announced bans on some level of plastic foam containers. Many of these
containers are made of a plastic resin known as expanded polystyrene. These polystyrene materials are difficult to recycle and
do not bio-degrade naturally. Considering the amount of plastic foam containers consumed every day in big cities which will soon
be banned and increasing political and socioeconomic pressures, we estimate that environmentally-friendly packaging products like
ours will be competitive alternatives for a variety of new customers.
(3)
Our R&D efforts and production facilities have prepared us to provide advanced environmentally-friendly packaging products
to meet demand.
In
addition, we launched paper straw product in 2018 after installing 35 paper straw production lines in our new Wenling factory.
Our customers for this product involve retailers, wholesalers, QSRs and restaurants. As more and more fast food restaurants and
coffee chains started using paper straws, we believe our sales on paper straws will keep growing.
Manufacturing
Locations
Mexico
Factory
Decision
to Invest in Mexico
We
decided to start production in Mexico for the following reasons:
1)
The ongoing U.S.- China trade tensions cast uncertainties for our export business to the U.S. market, our largest market segment
that accounted for 85% of our revenues during the first half of 2018. By contrast, Mexico has free-trade agreements with over
45 countries around the world, including U.S., making Mexico a perfect launch pad for global manufacturing. In addition, under
the maquiladora (shelter) structure that we are using, we are exempt to pay taxes in Mexico because all of our products will be
shipped to U.S. for sale.
2)
Mexico is only hours or at most a few days from U.S. supply outlets and market; the value chain between these two countries is
very short, reducing transportation costs and production time. Especially for the cups and straws or similar hollow products which
cannot be packed as tightly as cutlery and cause shipping costs as a higher percentage of the total cost, producing them in Mexico
instead of China and shipping them to U.S., especially to the south of U.S. will save us a lot of shipping fees.
3)
Mexico also has highly skilled and productive workforce. The Mexican maquiladora, which we are using now, is capable of handling
skilled manufacturing operations while maintaining a high rate of production.
4)
Mexico has a large population and is a significant consumer market. In addition, it is the gateway to the markets in Latin America.
Once we establish a presence in Mexico, we can explore the opportunities of entering the Latin American markets a few years down
the road.
Mexico
Project Plan
Schedule
On
December 11, 2018, we signed a service agreement with Disenos E Ideas Mexicanos, S.A. DE C.V. (“DIMSA”), which provides
services of administration, accounting, compliance, import/export, human resources, etc., for our Mexico operation. DIMSA is a
Mexican shelter services provider that incorporates a separate shelter company, Mayenco, S. de R.L. de C.V., (“Mayenco”)
in Mexico by providing a legal representative. Mayenco is owned by DIMSA from a legal standpoint and is contracted by Fuling USA
to manufacturing products in Mexico and then ship to the U.S. for us to sell. The shelter program allows foreign companies to
manufacture in Mexico without being required to organize and operate their own subsidiary, for example, as a Mexican corporation.
On
December 20, 2018, we, as a guarantor, through Mayenco as the lessee signed a lease agreement for a piece of land and a building
located in Interpuerto Monterrey Industrial Park, Mexico to use as our factory. The building is 7,804
m2
(approximately
84,002 square feet). From December 20, 2018 to June 30, 2019, we occupy 5,471
m2
while another tenant occupies the
rest. On July 1, 2019, after the other tenant moves out, we will occupy the entire building. The lease has a term of 50 months,
expiring in February 2023, with an option to extend the lease for an additional two years. According to the lease, after the grace
period from December 20, 2018 to February 14, 2019 during which we only needed to pay the maintenance fees, we started to pay
the monthly rent from February 2019. For the first four months, the monthly rent is $20,899 plus tax. After four months, the monthly
rent will be $29,810.47 plus tax.
On
January 2, 2019, we signed a maquila services agreement with Mayenco. The term of the agreement is one year and will be renewed
automatically unless terminated in advance by any party. According to the agreement, we are obligated to provide the machinery,
raw materials, technology and processes to manufacture our products and pay for all the expenses and costs. Mayenco is obligated
to manufacture, assemble and deliver the products to us or to whom we appoint.
Currently
we are delivering production machinery from China to Monterrey, Mexico. Factory renovating is expected to start in April 2019,
followed by equipment installation and testing and worker recruitment in May 2019. We expect to launch commercial production at
the Mexico Factory by July 2019.
Estimate
of the amount of expenditures
The
total investment spent for the first phase of the project will be roughly $4 million, including approximately $3.5 million of
fixed asset investment, and $0.5 million of working capital. We plan to finance the project with a capital investment of approximately
$2.0 million in equipment and machinery in 2019 and internal cash flow of 2.0 million. If we choose to increase production capability,
we will incur additional costs.
Production
Capacity
We
expect that the first phase of the Mexico Factory will have an annual design capacity of 10,000 tons and will be primarily used
for producing paper straws, paper cups and plastic straws serving the U.S. market.
Environmental
Considerations
The
major products that we plan to produce in the Mexico Factory are paper straws and paper cups. In the U.S., more and more fast
food restaurants and coffee chains including Starbucks announced that they are ditching plastic straws and opting for eco-friendly
alternatives, such as paper.
Our
company will strictly follow applicable environmental regulations and policies in Mexico.
Location
Below
is a diagram of the location of our Mexico facility.
Facility
Our
Mexico facility structure consists of 84,002 square feet of building area:
Allentown
Operation
Decision
to Invest in U.S.
The
United States is one of the world’s largest users of foodservice disposables; however, the United States has historically
relied on imported products, as U.S. manufacturing has been unable to meet the required pricing levels. We previously produced
substantially all of our products in China and shipped them to the United States for warehousing and sale. In 2014, we commenced
construction of a facility in Allentown, Pennsylvania. Because of our success in automating the manufacturing process, we believe
that the Allentown facility provides us a platform to manufacture products in the United States, particularly where doing so is
cost effective for us.
Of
the three categories of products we produce, the production of cutlery continue to occur in China, since our cutlery production
process is already heavily streamlined and the cost savings we receive from labor cost differences between the U.S. and China,
combined with our ability to pack shipments densely for transportation to the United States, makes it cost-effective to maintain
production in China at present.
By
contrast, cups and straws or similar hollow products are less cost effectively produced in China, since these products cannot
be packed as tightly as cutlery. As a result, shipping costs tend to be a higher percentage of the total cost of these products.
If we have substantial and consistent orders, we plan to fill the majority of such orders for drinking straws and cups from our
Allentown factory before our Mexico factory is set up and is capable of handling a large amount of orders.
The
factors involved in determining where we will manufacture a given product generally consist of the following:
|
1.
|
Labor
costs
. Currently the United States is much more expensive per hour for laborers, although U.S. laborers tend to be more productive
in the same amount of time.
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2.
|
Raw
materials
. The United States is slightly more expensive for raw materials that we use in production of our products than China
is. However, with the increased tariffs stemmed from the trade conflict between U.S. and China, this differential is narrowing
and in some materials, we found that U.S. offers a more cost effective sourcing.
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3.
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Electricity
. Electricity needed to produce our products costs more in China than in the United States.
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4.
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Shipping
. If we ship the products from China to the United States for sale, shipping costs can account for up to 40% of the price
of the product, depending upon the location and the product.
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5.
|
Taxes
. Taxes on our income for sales in the United States are different with the taxes for sales in China.
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As
a result of analyzing these factors, we determined that it was in the best interest of our company to invest in America, hire
U.S. workers and produce certain of our products in Allentown. We are manufacturing drinking straws in our Allentown facility.
Decision
to Invest in Allentown
Based
on the above analysis of the merits of moving production of some of our products to the United States, our next decision was where
to invest. We chose Allentown, Pennsylvania as the city to develop our first production line in the United States because of its
superior geographic location, strong economic status, and ties to China.
Allentown
is Pennsylvania’s third most populous city and is currently the fastest growing city in Pennsylvania. Part of the New York
City Metropolitan Area, Allentown is 50 miles north-northwest of Philadelphia, the fifth most populous city in the United States;
90 miles east-northeast of state capital Harrisburg and 90 miles west of New York City, the nation’s largest city.
Four
expressways run through the Allentown area, and the city is also a regional center for commercial freight rail traffic and is
close to several major airports. As a result, we expect transportation of our products to our customers will be convenient and
efficient.
Pennsylvania
is home to fifty Fortune 500 companies. Pennsylvania’s 2017 total gross state product of $752 billion ranks the state 6
th
in the nation. If Pennsylvania were an independent country, its economy would rank as the 18th largest in the world. Moreover,
Pennsylvania has a beneficial taxation policy that was attractive to our company in deciding where to locate manufacturing operations.
In Pennsylvania, personal income tax is a flat 3.07%. The corporate net income tax is 9.9% and is levied on federal taxable income,
without the federal net operating loss deduction. In addition, Pennsylvania allows a 20-year net operating loss carry forward
of up to $2 million a year.
Finally,
Pennsylvania has a strong trade relationship with China. Other than Canada and Mexico, China was the largest destination for exports
from Pennsylvania, with $2.7 billion in exports in 2017.
Allentown
Project Plan
Estimate
of the amount of expenditures
The
total investment spent on the project was roughly $9.3 million, including approximately $4.3 million of fixed asset investment,
and $5.0 million of working capital. If we choose to increase production capability, we will incur additional costs.
Schedule
We
signed the lease of the factory and acquired property for our Allentown facility in 2013 for approximately $235,100. For the year
ended December 31, 2018, we paid rental fees of approximately $47,000 per month, including tax and insurance. As of the time of
this filing, we have paid approximately $1.9 million for factory renovations. In addition, we rented a warehouse of 17,000 square
feet nearby for approximately $11,000 per month since June 2016.
The
preparatory work for the project began in the second half of 2013, and in October 2013 we committed with the Pennsylvania Department
of Commerce to invest and build the factory in Pennsylvania.
We
completed preparations for the preliminary stage of the project in early 2014. From May 2014 to December 2014, we finished the
construction and renovation of the factory.
From
January 2015 to May 2015, we purchased and installed the initial six straw production lines at a cost of approximately $1 million.
As of June 2016, we installed an additional six straw production lines at a total cost of about $610,000. All twelve production
lines have been in full operation and running 24/7 with 4 shifts of operators throughout the remainder of 2016.
Instead
of putting in another 12 straw production lines as we originally planned, we plan to diversify our product offering in Allentown
and use the space to bring in other manufacturing processes. From March 2016 to February 2017, we successfully tested and installed
six automated straw packaging machines – one machine for every two lines. As of the end of 2016, we installed a ten-silo
raw material storage and automatic distribution system was installed that is able to hold 430 metric tons of resin.
In
2017, we only made minor capital expenditures. We completed the installation of a raw material distribution system that included
construction of ten silos outside the factory building for storage of plastic materials. We focused on optimizing the utilization
of our existing equipment in Allentown and increased productivity by about 30%. At the same time, we reduced our labor cost per
ton output by 40% and caused Allentown operations to become profitable in the second half of 2017.
In
2018, we planned to initiate paper cup manufacturing at the Allentown facility with a $2.5 million projected investment on machinery.
The project was delayed because our technical experts on paper cup in China did not get visas to come to the U.S. In addition,
the U.S. tariff on importing paper boards, the major raw material to produce paper cups, increased in 2018. Then we shifted the
focus to starting up Mexico.
In
2019, if the demands of straws increase substantially, we will add straw production machines.
Production
Capacity
The
designated annual capacity is 2,400 tons of straw series products with the 12 straw production lines put into operations. We consistently
reached 100% capacity in 2018 producing 2,302 tons for the year, an increase of 33.7% from 2017. The plant operates 24/7 throughout
the year except on holidays and days under unusual weather conditions. In 2019, we will strive to exceed the 2,400 ton designed
capacity. However, if demands increase significantly, we will add new machines.
Environmental
Considerations
The
products from the Allentown project are designed to meet the environmental protection trends in the United States. The project’s
products are disposable plastic straws, which can be customized according to the specific needs of customers: either custom manufactured
biodegradable products or general products. In the U.S. market, our customers are increasingly requesting biodegradable products.
With the growing awareness of environmental protection and the implementation of local government initiatives limiting plastic
use and/or favoring recyclable or biodegradable products, we expect we will see demand for biodegradable products increase in
the future. We have designed the Allentown project to be able to deliver products that address these trends.
Our
company will strictly follow applicable environmental regulations and policies including the National Environmental Policy Act,
and other related policies such as the Clean Air Act and the Clean Water Act.
Location
Below
is a diagram of the location of our Allentown facility.
As
can be seen in the above map, the Allentown facility is located conveniently near the intersection of the Lehigh Valley Thruway
(U.S. Route 22), which stretches from Cincinnati, Ohio to Newark, New Jersey, and Pennsylvania Route 100, which runs from Pleasant
Corners through Philadelphia and into Chester County, Pennsylvania. In addition, the facility is less than 10 minutes from I-78,
a major road that sees more than 4 million trucks annually and links New York City and New Jersey with western points.
In
addition, its proximity to Lehigh Valley International Airport and Newark Liberty International Airport, both of which serve scheduled
airlines and cargo traffic, executive aviation as well as various logistics cargos, makes this area attractive and fitting for
this facility.
Facility
Our
Allentown facility structure consists of 88,000 square feet on 7.7 acres of land:
The
current build-out plan is as depicted below. The blue figures in the left lower corner represent our first 6 straw production
lines that we installed in 2015. The green figures in the middle represent the second six straw production lines we installed
in 2016. The red and green figures to the right represent paper cup manufacturing and plastic equipment we plan to install in
the future.
Current
Stage
We
have installed (1) twelve straw production lines, (2) six automated straw packaging machines – one machine for every two
lines; and (3) a ten-silo raw material storage and automatic distribution system. Our total investment in manufacturing equipment
has reached approximately $2.3 million.
Wenling
Expansion
Decision
to Build a New Factory in Wenling
We
decided to invest in building a new factory in Wenling for the following reasons:
1)
By building a new factory, we can meet the growing demand for our products. Currently the extent of utilization of our old factory
in Songmen Town of Wenling has reached 100% as expected. A new factory will allow us to expand our production capacity.
2)
The location of this new factory is in the Eastern New District of Wenling, only 5 km from our Songmen factory, so it is easy
for us to integrate the new factory into our business operations and leverage our existing resources to grow the new facility.
3)
The location of our new factory is only 15 km from the Longmen sea port, which is convenient for us to ship our products.
Wenling
Project Plan
The
project construction period is budgeted from April 2016 to December 2019, divided into three phases.
We
estimate the total amount of expenditures is approximately $63 million. We have financed the expansion with IPO proceeds, self-generated
cash flow and profits from operations, and will keep financing it with self-generated cash flow and profits from operations. We
have spent approximately $50 million on purchase of land use right, construction of facilities and equipment purchase. The major
equipment we plan to install includes 141 injection molding production lines and 26 vacuum thermoforming production lines in total.
The 141 injection molding production lines will produce cutlery, plates, cups and bowls. We anticipate that 8 of the 26 vacuum
thermoforming production lines will produce cups, and 18 of the vacuum thermoforming production lines will produce plates, cup
lids and various types of containers, such as vegetable containers, fruit containers and packaging containers. Currently we have
installed 129 injection molding production lines and 23 vacuum thermoforming production lines. We anticipate that the production
capacity will be increased by 47,150 tons after completion of the project.
The
following chart shows the specific status/plan:
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Phase
I
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Phase
II
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Phase
III
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Period
|
|
April 2016 – May 2017
|
|
August 2017 – August 2019
|
|
September 2019– December 2019
|
|
|
|
|
|
|
|
Actual/estimated
expenditures required
|
|
$31 million
1) Purchase of land
use right: $10 million for 32.45 acres (197 mu);
2) Construction of
facilities: $13 million for 54,450 square meters
of manufacturing facilities;
3) Equipment purchase:
$8 million.
|
|
$26.1 million
1) Construction of
facilities: $13.1 million;
2) Equipment purchase:
$7 million;
3) R&D: $6 million.
|
|
$5.5 million
1) Equipment purchase:
$1.5 million;
2) R&D: $4 million.
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Financing
resources
|
|
IPO proceeds and
self-generated
cash flow
|
|
Profit from operation in 2016, 2017
and 2018
|
|
Profit from operation in 2018
|
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|
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Actual/Anticipated
increase in production capacity
|
|
24,250 tons
|
|
13,000 tons
|
|
2,900 tons
|
|
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|
|
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141
injection molding production lines
|
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95 (capacity of 14,250 tons)
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40 (capacity of 6,000 tons)
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6 (capacity of 900 tons)
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26
vacuum thermoforming production lines
|
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10 (capacity of 10,000 tons)
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14 (capacity of 14,000 tons)
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2 (capacity of 2,000 tons)
|
Environmental
Considerations
The
production lines that we plan to install are capable of producing biodegradable products.
This
new factory is located in the Eastern New District of Wenling. Below is a diagram of the planned location of our Wenling facility
and the location of Longmen sea port which our facility will use. The star represents the proposed location of the factory, and
the triangle represents the newly-built Longmen sea port.
Facility
Our
new Wenling facility structure consists of 107,800 square meters on 33.27 acres of land. The plan includes four workshop buildings,
one warehouse, two dormitory buildings and one office building. We have built three workshop buildings and one warehouse which
occupy 54,000 square meters in total. Another workshop building of 20,700 square meters is under construction. The two dormitory
buildings consist of 380 rooms and can accommodate 1,520 workers. Workers have moved into these dormitory buildings. The office
building occupying 7,000 square meters is under construction. We expect it will be ready in August 2019.
Our
New Workshop Building in Wenling
Seasonality
Our
main business does not have significant seasonality.
Raw
Materials
Our primary raw materials are (1) PP, PS
which includes GPPS and HIPS, and PET, (2) plastic bags and membranes for packaging cutlery, (3) shipping cartons, (4) plastic
colorants, (5) paper board for paper straws, (6) paper napkins, salt, pepper and wet wipes for inclusion in cutlery packages and
(7) labeling materials. We purchase our raw materials from a variety of suppliers, including more than ten suppliers of our key
raw material, granular plastic resin. As we have a variety of options to supply us with raw materials for our products and the
technical demands of preparing such raw materials are relatively low, we do not anticipate any difficulties in obtaining raw materials
to produce our products. We are not reliant on a single supplier for any of our raw materials, and we expect we would be easily
able to replace any of our suppliers if we needed to do so.
Plastic
resin constituted approximately 75.5% of our raw material purchases in 2018. Plastic costs have recently been volatile as a result
of significant fluctuations in petroleum prices. The company considers only plastic resin cost fluctuations to be material, given
resin price volatility and plastic’s percentage of the cost of our products. We have historically been able to pass price
fluctuations on to our customers. We do this in two ways.
First,
for orders of our products by customers without long-term supply agreements with our company, we simply base the price quoted
to the customers on current commodity prices. As raw material prices increase and decrease, we are able to adjust the price of
our products as necessary.
Second,
for our supply agreements for customers that have long-term supply agreements, such as a QSR that sources straws in a five-year
agreement, we provide adjustable pricing that will fluctuate in part based on changes in plastic resin costs. Our client website
maintains commodity prices to enable both parties to track such fluctuations.
For
these reasons, we believe we will be able to adjust our pricing of products to allow us to maintain margins, serve our clients,
and to avoid shortages in raw materials in the event of price increases.
Marketing
Channels
We
mainly rely on our sales team to market our products. In addition, we attend trade fairs both in China and in U.S. frequently.
We also market our products through our websites.
Distribution
Channels
Geographic
Distribution of Revenues
Although
the vast majority of our customers are in the United States, we sell our products around the world. Following is a summary of
our total revenues by geographic market for each of our last three fiscal years. All amounts are presented in thousands of U.S.
dollars. Please note that the revenue here does not include our income from sources other than our serviceware products, which
are mainly sales of raw materials and recyclable waste.
(All
amounts in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
Year-over
Year
|
|
|
|
2018
|
|
|
2017
|
|
|
Increase
|
|
Region
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
Percentage
|
|
United States
|
|
$
|
118,308
|
|
|
|
85.32
|
%
|
|
$
|
106,564
|
|
|
|
85.79
|
%
|
|
$
|
11,744
|
|
|
|
11
|
%
|
Europe
|
|
|
6,622
|
|
|
|
4.78
|
%
|
|
|
6,101
|
|
|
|
4.91
|
%
|
|
|
521
|
|
|
|
9
|
%
|
Canada
|
|
|
1,636
|
|
|
|
1.18
|
%
|
|
|
1,944
|
|
|
|
1.57
|
%
|
|
|
(308)
|
|
|
|
-15.84
|
%
|
China
|
|
|
8,286
|
|
|
|
5.98
|
%
|
|
|
7,741
|
|
|
|
6.23
|
%
|
|
|
545
|
|
|
|
7.04
|
%
|
Others
|
|
|
3,812
|
|
|
|
2.75
|
%
|
|
|
1,859
|
|
|
|
1.50
|
%
|
|
|
1,953
|
|
|
|
105.06
|
%
|
Total
|
|
$
|
138,664
|
|
|
|
|
|
|
$
|
124,209
|
|
|
|
|
|
|
$
|
14,455
|
|
|
|
|
|
Markets
and Customers
Our
approach to competition in the market depends largely on the type of customer we seek to serve, as various customer industries
have different priorities for their purchasing decisions. Historically, we have sold our serviceware products to four categories
of customers (below estimates include sales through distributors to ultimate customers):
Type
of Customer
|
|
Products
Sold
|
|
Geographic
Region
|
|
Estimated
Sales % In 2018
|
|
|
Estimated
Sales %
In
2017
|
|
|
Estimated
Sales%
in
2016
|
|
Dealers
|
|
Serviceware,
Straws,
Cups, Plates
|
|
USA, Europe,
Canada,
others
|
|
|
46
|
%
|
|
|
46
|
%
|
|
|
67
|
%
|
QSRs
|
|
Serviceware,
Straws,
Cups
|
|
USA, China
|
|
|
27
|
%
|
|
|
29
|
%
|
|
|
27
|
%
|
Retailers
|
|
Serviceware,
Straws,
Cups, Plates
|
|
USA, others
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
1
|
%
|
Manufacturers
|
|
Serviceware
|
|
USA
|
|
|
20
|
%
|
|
|
21
|
%
|
|
|
5
|
%
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Distribution
Channels
When
we began to produce serviceware, we sold our products through distributors that had existing relationships with the ultimate customers
looking to purchase our products. Beginning in 2009, we began to sell directly to such purchasers. For the years ended December
31, 2018, 2017 and 2016, approximately 34%, 33% and 28% of our sales were made directly to end-users and retailers, respectively,
and approximately 46%, 46% and 67% of our sales were made to distributors including dealers, respectively. Although we believe
we benefit from having direct relationships with QSRs, retailers and other end users, we also believe that strong relationships
with distributors can allow us to penetrate smaller markets where we do not have the marketing resources to deliver our products
directly.
Methods
of Competition
Regardless
of our customers’ industry, our customers have clear expectations about the quality level and value they expect in purchasing
disposable serviceware. We are subject to frequent quality audits on an ongoing basis from new and existing customers, and we
constantly engage in product testing to ensure that our products meet our customers’ demands. Accordingly, although we describe
below our interpretation of the relative weight given to purchasing decisions in our customer categories, you should not read
the table to suggest that any of these features are unimportant to a customer. We have used four stars to reflect our belief that
an element is crucial to the customer’s decision-making, three stars to suggest that the element is very important, two
starts to suggest that it is important and one star to reflect that the element is less important.
Type
of Customer
|
|
Quality
|
|
Delivery
|
|
R&D
|
|
Service
|
|
Price
|
Dealers
|
|
**
|
|
***
|
|
***
|
|
****
|
|
****
|
QSRs
|
|
***
|
|
****
|
|
*
|
|
****
|
|
**
|
Retailers
|
|
***
|
|
****
|
|
***
|
|
***
|
|
***
|
Manufacturers
|
|
****
|
|
**
|
|
**
|
|
**
|
|
***
|
Competitive
Position
The
largest producers of foodservice disposables in the United States are significantly larger than our company. A recent report by
Freedonia estimates that three companies control approximately 29% of the foodservice disposable market in the United States,
and the top ten companies accounted for approximately 50% of the market in 2012. Because the entire foodservice disposable market
in the United States consists of packaging, serviceware and napkins, and other foodservice disposables — while we only compete
in the serviceware segment — we occupy a relatively small competitive position in the market as a whole.
Concentration
in the foodservice disposables industry varies widely within specific market segments, with some segments dominated by a small
number of producers. For example, Dart Container is the leading supplier of plastic foodservice beverage cups, followed by Pactiv
and Berry Plastics. By contrast, the market for cutlery is more fragmented, with a growing portion of the market supplied by contract
manufacturers in China. Among U.S.-based suppliers of foodservice disposable cutlery are Berry Plastics, D&W Fine Pack, Dart
Container (including Solo Cup), Georgia-Pacific, Maryland Plastics, Pactiv, and Waddington Group. Most of these firms offer a
number of different cutlery lines and are diversified into the production of straws and other foodservice disposables. In April
2012, D&W Fine Pack expanded its cutlery and straw offerings through its acquisition of Jet Plastica Industries. Prior to
the acquisition, Jet Plastica claimed to be the largest manufacturer of straws in the U.S. Other suppliers of foodservice straws
include Cell-O-Core, Earth Straws, New WinCup, Pactiv (via Spirit Foodservice), Rockline Industries, Royer, Stalk Market Products,
and Stone Straw (Wentworth Technologies).
Our
primary competitors are the following companies. We have set forth our assessment of our companies’ relative strengths and
challenges. This table represents our belief about our competitive position and is based on our observations, rather than objective
data except the ranking. The ranking is provided by the China Chamber of Commerce for Import and Export of Light Industrial Products
and Arts and Crafts regarding China’s plastic kitchenware and serviceware companies for exports. Our assessment may not
be shared by others, including such competitors, but it does represent management’s assessment of our industry position.
Moreover, the below statements of industry are based on our current knowledge in our industry; to the extent there are developments
we have not learned about (for instance, if a competitor has licensing agreements with a founder, rather than obtaining a patent
in its own name or if a competitor is in the midst of building an overseas manufacturing facility that has not yet been announced),
the below information may be incomplete.
|
|
Taizhou
Fuling
|
|
Jiaxing
Zhongli
Plastic
Co., Ltd.
|
|
Baohao
Plastic &
Hardware
Production
(Jiangmen)
Co Ltd
|
|
Ningbo
Homelink
Plastic
Product
Manufacture
Co.,
Ltd.
|
Ranking
|
|
2015:
No. 3
2016: No. 2
2017: No. 2
|
|
2015:
No. 6
2016: No. 8
2017: No. 6
|
|
2015:
No. 2
2016: No. 6
2017: No. 3
|
|
2015:
No. 1
2016: No. 1
2017: No. 1
|
|
|
|
|
|
|
|
|
|
Products
|
|
Disposable plastics
serviceware including cutlery, cups, containers,
straws, etc.
|
|
Disposable plastic
serviceware including cutlery, cups, straws, etc.
|
|
Plastic and hardware
household articles
and gifts.
|
|
Disposable plastics
serviceware including
cutlery, cups, straws, etc.
|
|
|
|
|
|
|
|
|
|
Overseas
sales, marketing and production
|
|
Four warehouses
and
distribution centers
in U.S. and two
warehouses in and
distribution centers.
The only one that
has
established
overseas
manufacturing factory.
|
|
Sales office and
warehouse in U.S.
|
|
Not known.
|
|
Sales office and
warehouse in U.S.
|
|
|
|
|
|
|
|
|
|
R&D
and Patents
|
|
Academician Expert
Workstation;
over 40 patents.
|
|
Not known.
|
|
Not known.
|
|
56 patents.
|
|
|
|
|
|
|
|
|
|
Customers
|
|
Dealers, QSRs
including
four of top
five, retailers,
manufacturers.
|
|
Dealers, QSRs,
retailers, manufacturers.
|
|
Dealers, restaurants,
retailers, manufacturers.
|
|
Dealers,
restaurants,
retailers, manufacturers.
|
|
|
|
|
|
|
|
|
|
Product
specification standard
|
|
Participate
in
initiating
and
drafting
the national
standard
General
Requirement
Of
Plastic Disposable Tableware.
|
|
No participation.
|
|
No participation.
|
|
No participation.
|
Nevertheless, we have been one of China’s
largest exporters of disposable serviceware. The China Chamber of Commerce for Import and Export of Light Industrial Products
and Arts and Crafts has recognized Taizhou Fuling as Number 2 out of 12,013 plastic kitchenware and serviceware companies for
exports from China in 2017, Number 2 out of 10,113 in 2016 and Number 3 out of 9,162 in 2015. In addition, we were rated one of
top 10 enterprises of plastic industry (daily plastic household products) in China light industries in 2017 by China National
Light Industry Council and China Plastic Processing Industry Association, based on our (1) revenue, (2) profit, (3) profit tax
rate, and (4) business growth rate.
We
have invested heavily ($15,653,364 since 2013 to 2018) in research and development to increase our future competitive position,
seeking to increase our use of environmentally-friendly materials, develop degradable and biodegradable materials, and reduce
reliance on fossil raw materials. In addition, we have developed advanced robotics to produce our products more efficiently and
at lower cost to be more competitive in the face of rising wages and higher quality demands.
Awards
and Recognition
The
Company is fully ISO 9001 and 14001 certified and, importantly, has obtained HACCP, GMP and FDA food facility registration certifications.
In
addition, our company is rated a Category A enterprise of China Customs, which provides streamlined customs clearance measures.
Taizhou Fuling has been a Category A enterprise since 2007 and submits a report on business management status to the PRC Customs
every year. We understand that the PRC Customs re-validate the rating of Category A enterprises on an irregular basis, and the
most recent written decision on re-validating Taizhou Fuling’s rating of Category A enterprise was received on October 24th
, 2014 from the PRC Customs.
Taizhou
Fuling can maintain the rating of Category A enterprises of PRC Customs if Taizhou Fuling simultaneously meets the following requirements
as a consignor and consignee of imported and exported goods according to the Measures of the PRC Customs for the Classified Administration
of Enterprises promulgated by PRC General Administration of Customs:
|
i.
|
Having
never committed the crime of smuggling, the act of smuggling or violation of the provisions on customs supervision and control
for one consecutive year;
|
|
|
|
|
ii.
|
Having
never been subject to any customs administrative punishment due to infringement on intellectual property rights by importing
or exporting goods for one consecutive year;
|
|
|
|
|
iii.
|
Having
not delayed nor defaulted on paying taxes or fines for one consecutive year;
|
|
|
|
|
iv.
|
Having
gross import or export value of more than $500,000 in the previous year;
|
|
|
|
|
v.
|
Having
an error rate of import and export declaration of less than 5% during the previous year;
|
|
|
|
|
vi.
|
Having
sound accounting rules, as well as truthful and complete business records;
|
|
|
|
|
vii.
|
Having
taken initiatives in cooperation with customs administration, timely handling various customs formalities, and providing truthful,
complete and valid documents and certificates to PRC Customs;
|
|
|
|
|
viii.
|
Submitting
the Report on Business Management Status every year;
|
|
|
|
|
ix.
|
Handling
the formality for reissuing and altering the Register Document for Customs Declaration of Consignees or Consigners of Import
or Export Goods of the Customs of the People’s Republic of China according to the provisions; and
|
|
|
|
|
x.
|
Having
no bad records in the administrative departments and institutions of commerce, People’s bank, industry and commerce,
taxation, quality inspection or foreign exchange and supervision for one consecutive year.
|
In
the last ten years, we have earned a variety of national, provincial and local honors, awards and certifications for our quality
products and scientific research efforts:
2018
|
●
|
Top
10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2018
|
|
|
|
|
●
|
Outstanding
Technology Innovative Enterprise in Chinese Plastic Processing Industry
|
|
|
|
|
●
|
Leading
Export Enterprise, Zhejiang Province
|
|
|
|
|
●
|
Famous
Export Brand in Zhejiang (2018-2020)
|
2017
|
●
|
Top
10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2017
|
|
|
|
|
●
|
Key
supporting Zhejiang Enterprise
|
|
|
|
|
●
|
Top
20 Zhejiang Enterprise with Offshore Investment Bolstering Export Sales
|
|
|
|
|
●
|
Zhejiang
Famous Trademark
|
|
|
|
|
●
|
Outstanding
Returned Project of Zhejiang Enterprise, 2016
|
|
|
|
|
●
|
FSSC
22000 Certificate of Registration for Food Safety Management System
|
2016
|
●
|
Top
10 Enterprises of Plastic Industry (Daily Plastic) in China Light Industries, 2016
|
|
|
|
|
●
|
China
Credible Enterprise published by State Administration for Industry and Commerce of China)
|
|
|
|
|
●
|
Province
Level Enterprise Research Institute – Zhejiang Fuling New Materials Research Institute (three years)
|
|
|
|
|
●
|
Taizhou
Top 20 Growing Enterprise
|
2015
|
●
|
Deputy
Chair of Zhejiang Plastics Industry Association
|
|
|
|
|
●
|
Wenling
Top 10 Industrial Enterprise
|
|
|
|
|
●
|
Taizhou
Export and Import Credit Enterprise (Grade A)
|
2014
|
●
|
Zhejiang
Famous Export Brand
|
|
|
|
|
●
|
Zhejiang
Famous Trademark
|
|
|
|
|
●
|
Wenling
Star Enterprise
|
|
|
|
|
●
|
Taizhou
Quality Enterprise Leader
|
Regulations
We
are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section
summarizes the principal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject
to laws, rules and regulations outside of the PRC include intellectual property, competition, taxation, anti-money laundering
and anti-corruption.
Foreign
Investment Restrictions Regulations
Historically,
the principal regulation governing foreign ownership of businesses in the PRC was the Guidance Catalogue for Industrial Structure
Adjustments (the “Guidance Catalogue”). The Guidance Catalogue classified various industries into three categories:
encouraged, restricted and prohibited. The Guidance Catalogue has been replaced by the Special Administrative Measures (Negative
List) for Foreign Investment Access (2018), effective July 28, 2018 (the ” Negative List”). The Negative List specifies
the prohibited and non-prohibited (similar to the restricted in the Guidance Catalogue) industries for foreign investment. For
the industries not covered by the Negative List, the foreign investment and the domestic investment have equal access. Foreign
investors may not invest in the prohibited industries specified by the Negative List. For the non-prohibited industries on the
Negative List, a foreign investor must obtain an investment permit. There are certain requirements on the equity ownership and
the executive officers of the foreign invested enterprises. If PRC has certain equity requirements in certain investment fields,
no foreign-invested partnership may be established. For example, pursuant to the latest Negative List, the provision of telecommunications
services and value-added telecommunications services fall in the prohibited industry and the percentage of foreign ownership cannot
exceed 50% (except for e-commence).
According
to the Negative List, our products are not prohibited. Therefore, our proportion of the foreign investment may be up to 100%.
As a result, FGI’s investment in our Chinese subsidiaries is in compliance with the Negative List.
Intellectual
Property Rights Regulations
The
Trademark Law of the PRC was adopted by the Standing Committee of the National People’s Congress (“NPC”) on
August 23, 1982 and was amended on February 2, 1993 and October 27, 2001. The PRC Trademark Law Implementation Rules, or the Implementation
Rules, were promulgated by the State Council on August 2, 2002 and became effective on September 15, 2002. The PRC is a signatory
country to the Madrid Agreement and the Madrid Protocol. These agreements provide a mechanism whereby an international registration
produces the same effects as an application for registration of the trademark made in each of the countries designated by the
applicant.
According
to the Trademark Law, the National Trademark Bureau under the SAIC is responsible for the registration and administration of trademarks
throughout the country. A “first-to-file” principle with respect to trademarks has been adopted. If trademark owners
deem an infringement to their trademarks constituted, they can file the dispute with the competent court or the relevant administrative
department. Should the case be so serious as to constitute a crime, trademark owners may lodge a complaint with the relevant public
security organization.
If
the registered trademark owners intend to assign their registered trademark, a registered trademark transfer agreement shall be
entered into between the owner and the assignee. The owner and assignee shall together apply to the National Trademark Bureau
for registration of such assignment as prescribed under the Trademark Law.
Registered
trademark owners may license other to use their registered trademark by concluding the registered trademark license agreement
and such license agreements shall be subject to filing recordation with the National Trademark Bureau according to the Trademark
Law. The licensor shall supervise the quality of the commodities on which such registered trademark is used, and the licensee
shall guarantee the quality of such commodities.
The
Measures for the Administration of Domain Names for the Chinese Internet, or the Domain Names Measures, were promulgated by the
Ministry of Information Industry on November 5, 2004 and became effective on December 20, 2004. The Domain Names Measures govern
registration of domain names with the internet country code “.cn” and domain names in Chinese. We have one website
(www.fulingplastics.com.cn) governed by the Domain Names Measures.
The
Measures on Domain Names Dispute Resolution, or the Domain Names Dispute Resolution Measures, were promulgated by the China Internet
Infrastructure Center on February 14, 2006 and became effective on March 17, 2006. The Domain Names Dispute Resolution Measures
require domain name disputes to be submitted to institutions authorized by the China Internet Network Information Center for resolution.
Regulations
on Tax
The
Law of the People’s Republic of China on Enterprise Income Tax (the “EIT Law”), promulgated by NPC on March
16, 2007 and put into force on January 1, 2008, imposes a uniform enterprise income tax rate of 25% on all resident enterprises
in China, including foreign-invested enterprises, on all their income and a tax rate of 10% on non-resident enterprises on their
income from the jurisdiction of PRC.
Attention
shall be paid to the fact that non-resident enterprises may be considered resident enterprises for the purpose of EIT if their
de facto management bodies are located within the PRC territory and therefore their global income is subject to a tax rate of
25%. The Notice of the State Administration of Taxation on Issues Relevant to Foreign-registered Chinese-invested Holding Enterprises
Determined as Resident Enterprises in Accordance with Actual Management Organization Standard (“Circular 82”), promulgated
by the State Administration of Taxation (“SAT”), provides that, a foreign Chinese-invested enterprise, if it concurrently
satisfies the following conditions, for the purpose of the EIT, shall be determined to be a non-domestically-registered resident
enterprise when: (1) The places where the top managers and the top management departments that are responsible for implementing
the routine production, management and operation of the enterprise, perform their duties within the territory of China; (2) The
financial decisions (such as borrowing, lending, financing, financial risk management, etc.) and the personnel decisions (such
as appointment, dismissal, remuneration payment, etc.) of the enterprise shall be made or be approved by the organization or the
persons within the territory of China; (3) The primary properties, accounting books, company seals, summaries and archives of
the board meetings and shareholders meetings shall be placed or kept within the territory of China; and (4) One half or more of
the enterprise’s directors or top managers having rights to vote shall frequently reside within the territory of China.
Our PRC counsel, Jingtian&Gongcheng Attorneys at Law advised that because we (“FGI”) are incorporated in Cayman
Islands, we do not meet the conditions outlined in Circular 82, however, our tax residency status is subject to the discretion
of the PRC tax authorities whose determination is hard to predict, so we will continue to monitor our tax residency status.
The
implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or
(ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital
gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the EIT Law, and
it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax
resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident enterprises
as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and as
a result become subject to PRC withholding tax at a rate of up to 10% unless any such non-resident individuals’ jurisdiction
has a tax treaty with China that provides for a preferential tax rate or a tax exemption.
The
Interim Regulations of the People’s Republic of China on Value-added Tax, promulgated by State Council on November 10, 2008
came into force on January 1, 2009, impose a Value-Added Tax at the rate of 17% on the revenues from sales of goods. According
to the Notice of the Ministry of Finance and the State Administration of Taxation on Raising the Export Tax Rebate Rates for Certain
Commodities, promulgated by the Ministry of Finance and SAT on June 3, 2009, the export tax rebate rate is 13% for certain plastic
products. In 2014, 99.6% of our products benefitted from the 13% export tax rebate.
In
April 2018, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on Adjusting the Tax Rate
of Value-added Tax (Circular 32 of Finance and Taxation, 2018). The Notice clearly stipulates that, from May 1, 2018, for all
taxpayers who have engaged in taxable sales of VAT or imported goods, where the original 17% and 11% tax rates were applied, the
tax rates shall be adjusted to 16% and 10%, respectively. This can lighten the operation burden of enterprises to a certain extent.
Foreign
Exchange Regulation
The
Regulations of the People’s Republic of China on Foreign Exchange Control, promulgated by State Council on August 5, 2008,
lays the legal framework for foreign exchange control in PRC. A number of notices, implementing rules, replies and circulars are
promulgated thereunder to clarify the regulations on the foreign exchange. Under these regulations, payments of current account
items, such as profit distributions, may be made in foreign currencies without prior approval from SAFE provided that certain
procedure is complied with. Where, however, payments of capital account is involved, such as RMB is to be converted into foreign
currency for the purpose of remitting out of China to retire foreign currency-denominated loans, approval from or registration
with appropriate government authorities is required. According to the SAFE Circular 142 i.e., Notice of the General Affairs Department
of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration
of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, promulgated by SAFE on August 29, 2008 and
SAFE Circular 45, promulgated by SAFE on November 9, 2011, the RMB capital converted from foreign currency registered capital
of a foreign-invested enterprise may only be used for purposes falling within the business scope approved by the relevant authority
and may not be used for equity investments within the PRC. The use of such RMB capital may not be altered without SAFE’s
approval, and such RMB capital may not in any way be used to retire RMB loans where the proceeds of such loans have not been used.
The
Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, promulgated
by SAFE on November 19, 2012, materially amends and, therefore, simplifies the foreign exchange procedure then existing. Various
special purpose foreign exchange accounts may be opened in different provinces, which was prohibited previously. The Circular
on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors
and the Supporting Documents, promulgated by SAFE in May 2013, provides for that the administration by SAFE or its local branches
over direct investment by foreign investors in the PRC shall be conducted through registration and banks shall process foreign
exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its
branches.
We
have obtained all material approvals and permits necessary for our operation in the PRC from SAFE and other PRC government authorities.
SAFE
Circular 37
The
Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, promulgated by SAFE on October 21, 2005 and designed to replace the
former circular commonly known as “SAFE Circular 75”, requires registration of PRC residents with local branches of
SAFE with respect to their direct establishment or indirect control of an offshore entity (referred to in SAFE Circular 37 as
“special purpose vehicle”), where such offshore entity are established for the purpose of overseas investment or financing,
provided that PRC residents contribute their legally owned assets or equity into such entity.
SAFE
Circular 37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle,
such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, divestiture or other
material event.
Any
violation of these registration requirements may, among other liabilities that may be imposed under PRC laws governing evasion
of foreign exchange controls, cause the PRC subsidiaries of the special purpose vehicle be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and may cause the special purpose
vehicle’s ability to contribute additional capital into its PRC subsidiary be restricted.
Regulation
of Dividend Distribution
The
Company Law of the People’s Republic of China, promulgated by Standing Committee of the NPC on December 28, 2013 and came
into force on March 1, 2014, and the Wholly Foreign-owned Enterprise Law, promulgated and came into force on October 31, 2000
by Standing Committee of the NPC, provide that dividend may only be paid out of accumulated profits as determined in accordance
with applicable accounting standards provided that: (1) all losses from prior fiscal years have been offset; and (2) a general
reserve has been established and which shall amount to the 50% of the registered capital.
Labor
Laws and Social Insurance
The
Labor Contract Law was promulgated by the Standing Committee of the NPC on June 29, 2007 and became effective on January 1, 2008.
The
Labor Contract Law requires employers to enter into written contracts with their employees, restricts the use of temporary workers
and aims to give employees long-term job security. Pursuant to the Labor Contract Law, employment contracts lawfully executed
prior to the implementation of the Labor Contract Law and continuing as of the date of its implementation shall continue to be
performed. If an employment relationship was established prior to the implementation of the Labor Contract Law with no written
employment contract executed, a contract must be executed within one month after the implementation of the Labor Contract Law.
In
addition, according to the PRC Social Insurance Law, social insurance in China includes basic pension insurance, basic medical
insurance, work-related injury insurance, unemployment insurance and maternity insurance. Both employers and employees must pay
basic pension insurance contributions based on the employee’s wage category, as required by the relevant regulations. Employees
participating in basic pension insurance schemes are entitled to receive monthly basic pensions if their accumulated contribution
period has reached or exceeded 15 years when they reach the statutory retirement age. A notice issued by the Social Assurance
Authority provides that retirement is permitted at age of 60 for male employees and between 50 and 55 for female employees. Social
insurance (including pension insurance) payment obligations end at such voluntary retirement ages.
In
July 2018, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council
issued the Reform Plan for the Taxation and Administration System of State Taxes and Local Taxes (hereinafter referred to as the
Reform Plan). The Reform Plan clearly stipulates that from January 1, 2019, all social insurance premiums, such as basic old-age
insurance premium, basic medical insurance premium, unemployment insurance premium, industrial injury insurance premium and maternity
insurance premium, will be levied by the tax authorities. The Reform Plan makes the collection of social insurance fees more transparent
and standardized, and reduces a certain degree of flexibility that enterprises can enjoy before. For enterprises that have not
paid all the related fees before, the Reform Plan will increase the financial burden of enterprises, which may even face administrative
penalties and illegal risks. The details of how to levy social insurance fees need to be clarified.
Company
Law
The
Company Law of the PRC, adopted at the Fifth Session of the Standing Committee of the Eighth National People’s Congress
on December 29, 1993, was amended for the first time at the 13th Session of the Standing Committee of the Ninth National People’s
Congress on December 25, 1999; amended for the second time at the 11th Session of the Standing Committee of the Tenth National
People’s Congress on August 28, 2004; revised at the 18th Session of the Standing Committee of the Tenth National People’s
Congress on October 27, 2005; and Revised at the 6th Session of the Standing Committee of the Twelfth National People’s
Congress on December 28, 2013, takes effect on March 1, 2014 (the “Company Law”).
Pursuant
to the Company Law, (1) the term “company” shall refer to a limited liability company or a Company Limited by Shares;
(2) the shareholders of both Limited Liability Company and Company Limited by Shares shall only be subject to the liability of
the company to the extent of the capital contributions they have subscribed; (3) the minimum amount of registered capital of a
limited liability company and the minimum percent of cash contribution by shareholders have been eliminated by revision in 2014.
Wholly
Foreign-Owned Enterprise Law
The
Law of the PRC on Wholly Foreign-owned Enterprises, or the WFOE Law, was adopted by the NPC on April 12, 1986 and was amended
on October 31, 2000. Moreover, the Implementation Regulation of the WFOE Law was promulgated on December 12, 1990 and amended
on April 12, 2001.
The
ratio between its registered capital and total amount of investment shall be in conformity with the relevant regulations of the
PRC, and the difference between its registered capital and total amount of investment equal to the amount of foreign exchange
loans that the WFOE is permitted to borrow from its foreign investor.
Environmental
Protection
The
Environmental Protection Law, promulgated by the Standing Committee of NPC on December 26, 1989 and came into force on December
26, 1989, lays the foundation of the legal framework for environmental protection in the PRC. The Ministry of Environmental Protection
under the State Council is charged with the administration of The Environmental Protection Law.
The
Law on Prevention and Control of Environmental Pollution by Solid Wastes (“the Solid Wastes Law”), promulgated by
the NPC on December 29, 2004 and came into force on April 1, 2005, provides that any disposition of hazardous wastes shall be
in compliance with relevant provisions promulgated by the State. Moreover, it is forbidden to supply or entrust hazardous wastes
to entities that do not have business licenses and qualifications for the collection, storage, utilization and disposition of
solid wastes. The Air Pollution Prevention Law, promulgated by the Standing Committee of the NPC on April 29, 2000 and came into
force on September 1, 2000, The Water Pollution Prevention Law, promulgated by the Standing Committee of the NPC on May 11, 1984
and came into force on November 1, 1984 as amended on March 15, 1996 and February 28, 2008 are also important laws in this area.
Under
these regulations, a number of requirements for handling, storage, treatment, transportation and disposal of regulated substances
and wastes must be complied with and enterprise that discharge wastes into air or waters must obtain a permit and pay the waste
treatment fees. Violation of these regulations may cause the violator to be subject to injunction and/or fine. We have obtained
all material approvals necessary for our business operations.
Property
The
Law of the PRC on Property, or the Property Law, was promulgated by the Standing Committee of the NPC on March 16, 2007 and became
effective on October 1, 2007. Under the Property Law, any creation, modification, transfer or termination of property rights shall
only become effective upon registration with the relevant government authorities. All lawful property of the State, collective
organization and individual are protected by the Property Law against embezzlement and encroachment.
The
Law of the PRC on Land Administration, or the Land Administration Law, was promulgated by the Standing Committee of the NPC on
June 25, 1986 and became effective on January 1, 1987 and as amended on December 29, 1988 and August 28, 2004. According to the
Land Administration Law, the lands within territory of the PRC are classified into two categories, state-owned land and collective-owned
land. The use right of state-owned land can be obtained through either government allocation or grant with grant fees paid.
It
further prescribes that any entity who intends to conduct construction must construct on the state-owned land except as otherwise
provided under the Land Administration Law. The collective-owned land shall not be granted, assigned or leased for use of agriculture-unrelated-construction
unless it otherwise falls in the scope permitted under the Land Administration Law. Violation of such provisions under the Administration
Law may result in fines and confiscation of the buildings constructed on the land.
The
Urban Real Estate Administration Law was promulgated by the Standing Committee of the NRC on July 5, 1994 and became effective
on January 1, 1995 and as amended on August 30, 2007. According to the Urban Real Estate Administration Law, if the real estate
is mortgaged to third party the land where such real estate occupies shall also be mortgaged together.
Product
Liability
Under
the current PRC laws, manufacturers and/or vendors of defective products in the PRC may incur liability for loss and injury caused
by such defective products. Pursuant to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, promulgated
by the NPC on April 12, 1986, a defective product which causes property damage and/or physical injury to any person may subject
the manufacturer and/or vendor of such defective product to civil liability for such damage and/or injury caused therefrom.
The
Product Quality Law of the PRC, or the Product Quality Law, was promulgated by the Standing Committee of the NPC on February 22,
1993, to supplement the PRC Civil Law aiming to protect the legitimate rights and interests of the end-users and consumers and
to strengthen the supervision and control over the quality of products. The Product Quality Law was revised on July 8, 2000. Pursuant
to the revised Product Quality Law, manufacturers who produce defective products may be subject to civil or criminal liability
and have their business licenses revoked.
The
Law of Protection of the Rights and Interests of Consumers, or the Consumers Protection Law, was promulgated by the Standing Committee
of the NPC on October 31, 1993, and became effective on January 1, 1994. The Consumers Protection Law provides further protection
to the legal rights and interests of consumers in connection with the purchase or use of goods and services. At present, all business
operations must observe and comply with the Consumers Protection Law when they provide their goods and/or services.
The
Tort Law of the PRC, or the Tort Law, was adopted by the Standing Committee of the NPC and promulgated on December 26, 2009 and
will become effective on July 1, 2010. The Tort Law establishes a separate chapter regarding product liability. Compared to previous
laws and regulations in relation to product liability, the provisions of the Tort Law expressly provide that, in the event that
any entity is clearly aware of the defects existing in the products but notwithstanding manufactures and distributes such defective
products which finally cause others’ death or serious injury, those so infringed upon are entitled to claim punitive damages.
U.S.
Regulations
Federal,
state and local governments mandate a variety of laws and regulations aimed at serviceware products and packaging products. At
the federal level, the Food and Drug Administration (“FDA”), the Consumer Product Safety Commission and the Environmental
Protection Agency (“EPA”), among other federal agencies, have promulgated regulations that directly or indirectly
affect the products we produce.
For
example, the FDA is charged with, among other responsibilities, regulating industry to ensure that food contact substances are
safe, approving materials for use in foodservice disposables, and setting safety standards for products made with recycled content.
Unlike many other industrialized nations, the U.S. does not currently have national packaging recycling laws in place; such laws,
where they exist, are at the state level.
The
Affordable Care Act (“Obamacare”) requires restaurant chains with over 20 locations to display the calorie content
of each food and drink item it serves on signs and printed menus. Such regulation may indirectly affect our product usage as the
intention of such regulation is to encourage healthier eating and better food choices, including a decrease in consumption of
food from fast food restaurants and quick service restaurants.
State
and local governments regulate restaurant cleanliness standards, with which foodservice disposables must comply. And a number
of states, including large states such as California and Florida, as well as cities and counties have passed regulations governing
consumer packaging materials. Polystyrene foam bans are particularly widespread among local governmental regulations, particularly
in California, which has more than 50 cities and counties that have restricted or banned foamed polystyrene containers. Although
no state has yet to impose a statewide ban on polystyrene, numerous bills that would accomplish such ban have been promoted in
various state legislatures.
C.
Organizational Structure
Below
is a chart representing our current corporate structure:
Our
registered office in the Cayman Islands is at Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay
Road, Grand Cayman, KY1-1205, Cayman Islands, telephone +1.345.769.9372.
D.
Property, Plant and Equipment
Property
There
is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes.
We, including our wholly owned subsidiary Great Plastics, were granted land use rights for our facilities in Sanmen County and
Songmen Town, which extend until between 2053 and 2060.
In
the U.S., in October 2013, we committed with the Pennsylvania Department of Commerce to invest and build a factory in Allentown,
Pennsylvania. On February 27, 2014, Fuling signed a lease of premises in Allentown, Pennsylvania for general office, manufacturing
and warehousing purposes. The Allentown project contemplates construction of the factory, renovation of the rented premises in
Allentown and the purchase and installation of 12 production lines of manufacturing equipment.
On
December 20, 2018, we, as a guarantor, through Mayenco as the lessee, signed a lease agreement for certain property located
in Interpuerto Monterrey Industrial Park, Mexico to use as our factory. The building is 7,804 m2 (approximately 84,002 square feet).
Following
is a list of our properties, including the first four, which we lease:
Transferee/
Lessee/Owner
|
|
Property
|
|
Land/Building
Use Term
|
|
Space
(m2)
|
|
|
Ground
Floor Area
(m2)
|
|
|
Productive
Capacity
(ton)
|
|
|
Extent of
Utilization
|
|
|
Products
Produced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuling USA
|
|
Commercial/industrial space at 6690 Grant Way, Suite 1, Allentown, PA 18106
|
|
2014-03-01 until 2024-05-31
|
|
|
8,175.47
|
|
|
|
|
|
|
|
2,400
|
|
|
|
100
|
%
|
|
Straws
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuling USA
|
|
Warehouse at 6370 Hedgewood Drive, Suite 120, Allentown, PA 18106
|
|
2016-06-01 until 2021-05-31
|
|
|
1,579
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuling USA
|
|
Industrial unit at Ave. Gomez Morin No. 955 L-317, Col. Montebello, San Pedro Garza García, C.P. 66279.
|
|
2018-12-20 until 202023-02-20
|
|
|
|
|
|
|
5,470.92
|
|
|
|
10,000
|
|
|
|
0
|
%
|
|
Expect to be paper straws, paper cups and plastic straws
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Factory building at 8 Shengpan Road, Guanweitong Village, Wenqiao County
|
|
2019-01-01 until 2020-12-31
|
|
|
5,120.00
|
|
|
|
|
|
|
|
6,000
|
|
|
|
100
|
%
|
|
Knives and forks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Land at 88 Jintang S Rd, Eastern New District, Wenling City
|
|
2016-04-14 until 2066-04-06
|
|
|
|
|
|
|
95,833.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Factory buildings and warehouse at 88 Jintang S Rd, Eastern New District,, Wenling City
|
|
Until 2066-04-06
|
|
|
54,000.00
|
|
|
|
|
|
|
|
51,700
|
|
|
|
90
|
%
|
|
Mainly cups, knives, straws, forks, plates and bowls
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Non-residential building in Ximen Village, Songmen Town
|
|
No expiration (rights acquired 2000-04-27)
|
|
|
177.58
|
|
|
|
|
|
|
|
(rent out)
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Non-residential building in Ximen Village, Songmen Town
|
|
No expiration (rights acquired 2000-04-27)
|
|
|
668.89
|
|
|
|
|
|
|
|
(rent out)
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Land in South of Binhai Road, Songmen Town
|
|
2007-03-27 until 2053-03-10
|
|
|
|
|
|
|
13,996.79
|
|
|
|
13,970
|
|
|
|
100
|
%
|
|
Mainly knives, forks, paper cups, plates and bowls
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Land in South of Binhai Road, Songmen Town
|
|
2007-03-27 until 2055-01-14
|
|
|
|
|
|
|
14,076.80
|
|
|
|
|
|
|
|
|
|
|
Same as above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Non-residential building in South of Binhai Road, Songmen Town
|
|
2013-07-25 until 2053-03-10
|
|
|
491.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same as above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Non-residential building in South of Binhai Road, Songmen Town
|
|
2013-07-25 until 2053-03-10
|
|
|
1,471.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same as above
|
Taizhou Fuling
|
|
Non-residential building in South of Binhai Road, Songmen Town
|
|
2013-07-25 until 2053-03-10
|
|
|
2,559.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same as above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Non-residential building in South of Binhai Road, Songmen Town
|
|
2013-07-25 until 2053-03-10
|
|
|
1,847.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same as above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Non-residential building in South of Binhai Road, Songmen Town
|
|
2013-07-25 until 2053-03-10
|
|
|
3,694.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same as above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Non-residential building in South of Binhai Road, Songmen Town
|
|
2013-07-25 until 2055-01-14
|
|
|
7,717.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same as above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
Land in Southeast Industrial Zone, Songmen Town
|
|
2015-01-29 until 2065-01-15
|
|
|
|
|
|
|
2,576.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
N/A
|
(1)
|
The
dormitory has 130 rooms, and is able to accommodate 350 employees. Currently 90 rooms are occupied by 212 employees.
|
Fixed
assets at our properties consist of office equipment, buildings, structures, ancillary facilities, and equipment for production
and packaging of plastic foodservice disposals including plastic food containers, drinking straws, cutlery, cups and plates, and
others.
Some
of our real property and fixed assets are encumbered by secured loans from our creditors. For example, Agricultural Bank of
China Taizhou Branch has encumbrances on Taizhou Fuling’s land use right and building ownership right in the property
located at 88 Jintang S Rd, Eastern New District, Wenling City, to guarantee all of our loans with Agricultural Bank of China
from June 27, 2018 to September 28. Bank of China Wenling Branch has encumbrances on Taizhou Fuling’s land use right
and building ownership right in the property located at South of Binhai Road, Songmen town. The term of our loan with Bank of
China is from March 26, 2018 to March 26, 2023.
None
of our property is affected by any environmental issues that may affect our use of the property. At present, our plans to further
develop, expand or improve these properties are funded through proceeds from our initial public offering and through our operating
cash flows. Regarding details of our Allentown expansion and Wenling expansion, please see “Item 4. Information on the Company
– B. Business review.”
In
addition to our property rights, we also currently have agreements to warehouse our products for delivery to customers. We pay
storage and handling fees based on the quantity of goods we are warehousing at most of such facilities. We expect to devote part
of such facility to warehousing our products prior to delivering to our customers. We may, from time to time, enter into new agreements
to meet our warehousing needs.
Plant
Currently,
we have the following factories, three in China, one in U.S., and one in Mexico.
|
1.
|
Wenqiao
factory: 8 Shengpan Road, Guanweitong Village, Wenqiao County, Wenling City, Zhejiang Province, China
|
|
|
|
|
2.
|
Songmen
factory: South of Binhai Road, Songmen Town, Wenling City, Zhejiang Province, China
|
|
|
|
|
3.
|
Wenling
factory: 88 Jintang S Rd, Eastern New District, Wenling City, Zhejiang Province, China
|
|
|
|
|
4.
|
Allentown
factory: 6690 Grant Way, Allentown, PA, USA
|
|
|
|
|
5.
|
Mexico
factory: Ave. Gomez Morin No. 955 L-317, Col. Montebello, San Pedro Garza García, C.P. 66279
|
We
are in the process of constructing our Wenling factory and renovating our Mexico factory.
Regarding details to our material plans to these projects, please see “Item 4. Information on the Company —B. Business
Review”.
Equipment
As
labor has become more expensive in China, we have found that we have less of an advantage over similarly situated companies from
certain other countries. As a result, we have focused on increasing automation to reduce our reliance on labor, especially for
cutlery. Because we have developed some of our own machinery for producing and packaging our products, we believe we have advantages
over less automated competitors.
We
are using more and more fully automated machinery including automatic injection molding machines, robotic arms, and automatic
delivery systems. For example, we developed a six-in-one automatic packing machine to meet our customers’ needs. This machine
can combine six steps into one step. Therefore, it packs forks, cutlery, napkins and other plastic serviceware into a single plastic
package. A normal packing machine would require seven workers to operate. This machine reduces labor demand to only four workers.
Most
of our automatic machines are customized. For instance, we cooperated with a manufacturer to transform a normal injection molding
machine into a professional, industrial-quantity injection molding machine for serviceware production. We also cooperated with
an automation factory to produce robotic arms for our production system.
The
following chart shows some of our advanced equipment.
Equipment
|
|
Function
|
|
|
|
Elemental
Analyzer
|
|
Our
elemental analyzers can detect 26 kinds of toxic heavy metal elements and detect a variety of regular and irregular sample
of the power, plate, linear. Alloys, metal materials and plastic materials can be detected.
|
|
|
|
Injection
Molding Machine
|
|
Our
injection molding machine is also called an injection machine. It is our main molding equipment using plastic molding to make
thermoplastic or thermosetting plastic into various shapes of plastic products. High power is applied to molten plastic to
fill the mold cavity and injection. The dedicated robotic arm of the injection molding machine is able to automate transportation
of products or running tools according to the predetermined requirement for the operation of automated production equipment.
|
|
|
|
Vacuum
Magnetron Sputtering Coating Machine
|
|
Our
vacuum magnetron sputtering coating machine mainly uses direct current (or intermediate frequency) magnetron sputtering and
can be adapted to a wide range of coating targets, such as copper, titanium, chromium, stainless steel, nickel and other metal
materials, which can be coated using a sputtering process. It can also improve film adhesion, reproducibility, density, uniformity
and other characteristics.
|
|
|
|
Four-Layer
Co-Extruded Sheet Machine
|
|
Our
four-layer co-extrusion sheet machine is mainly suitable for PP, PS and other raw materials, production of various high-grade
thermalformed sheets and stationery sheets. Widely used in the manufacture of various high-grade four-layer sheets, the machine
is suitable for manufacturing high-grade beverage cups, jelly cups, food packaging and other packaging containers.
|
|
|
|
High-Speed
Plastic Molding Machines (Computer Controlled)
|
|
Our
computer controlled high-speed plastic molding machine is suitable for PS, modified PP and PET reel sheet. It can manufacture
to a variety of specifications, including disposable fast-food containers, instant noodle bowls, western food boxes, food
packaging for products such as candy and cake boxes, daily necessities, metal packaging, children’s toys and agricultural
seedling trays.
|
|
|
|
Thermoforming
Machine
|
|
Our
thermoforming machine is mainly suitable for HIPS, PS, PVC, PET and other plastic sheet, using heating principles to form
plastic sheets, including in particular the production of, among other items, various small spoons and plate covers.
|
From
2013 to 2018, we invested approximately $26.8 million on advanced equipment and technology to increase our productivity levels,
increasing our annual per-production worker output from approximately $102,562 in 2013 to approximately $141,920 in
2018, an important 38% performance improvement.
We
have established an automation department in 2015 to work on research and development for that aspect of our manufacturing process.
We believe we still have room to continue to automate our production processes and enjoy additional savings in labor expenses
and increased productivity.
The
following pictures show some of the automation in our factories and product lines.
Injection
Molding Machine (including robotic arm) in our Songmen factory.
High-Speed
Plastic Molding Machines (Computer Controlled) in our Sanmen factory.
Four-Layer
Co-Extruded Sheet Machine in our Sanmen factory.
Item 4A.
|
Unresolved
Staff Comments
|
None.
Item 5.
|
Operating
and Financial Review and Prospects
|
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes that appear in this annual report. In addition to historical consolidated
financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs.
Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk
Factors.”
A.
Operating Results
Overview
of Company
We
are a specialized production and distribution company for environmentally-friendly plastic and paper serviceware with primary
customers from the United States and European countries. We mainly conduct our operations in China and United States through our
wholly owned subsidiary, Taizhou Fuling Plastics Co., Ltd. and its subsidiaries in both countries.
Our plastic and paper serviceware products
are made from environmentally-friendly material. Our products include disposable cutlery, drinking straws, cups and plates and
other plastic products. Our largest customer base is in the United States. Our production facilities include four factories in
Zhejiang Province, China and one factory in Pennsylvania, U.S., and we have obtained ISO9001 quality management system, ISO14001
environmental management system, HACCP, FDA food facility registration and GMP certifications. These certifications are crucial
for businesses like ours that serve some of the most sophisticated purchasers of foodservice disposables in the world.
Our
primary raw materials in production of our products include PP, GPPS, HIPS and PET, which are extracted from crude oil. Thus,
our cost of raw material is highly impacted by fluctuations in the price of oil. Cost of revenues mainly includes costs of raw
materials, costs of direct labor, utilities, depreciation expenses and other overhead.
Our
largest product category is disposable cutlery. It includes forks, knives, spoons, general, specialized and multipurpose utensils
(for instance, the spork), both in single- and multi-utensil packages. It accounted for 48%, 50% and 52% of our revenue for the
years ended December 31, 2018, 2017 and 2016, respectively, and we believe it will continue to be a key area for growth in the
coming years. Our other product categories are (i) drinking straws, (ii) cups and plates and (iii) other plastics products, which
accounted for 17%, 27% and 8% of the total sales respectively for the year ended December 31, 2018, 15%, 27% and 8% of the total
sales respectively for the year ended December 31, 2017 and 14%, 27% and 7% of the total sales respectively in the year ended
December 31, 2016.
Direct
Link, one of our subsidiaries was incorporated in the United States in 2011 and is engaged in the distribution of our products
in the U.S. In May 2014, Fuling Plastic USA, Inc. (“Fuling USA”) was incorporated in the Commonwealth of Pennsylvania
as a wholly-owned subsidiary of Taizhou Fuling. Fuling USA has established the Company’s first production factory in the
U.S. and principally engages in the production of plastic drinking straw items. We have not established any subsidiaries in Europe
and we rely on the sales forces located in China to export our products to European countries. In September 2016, Wenling Changli
Import and Export Co., Ltd (“Wenling Changli”) was established in Wenling, China as a wholly-owned subsidiary of Taizhou
Fuling. Wenling Changli principally engages in the export of materials to our Allentown facility.
On
November 22, 2018, Great Plastics signed sales contracts with a third party to sell the land and buildings previously used as
one of its manufacturing factories in China (aka, the “Sanmen Factory”) for total cash consideration of RMB 40.2 million
(approximately US$5.8 million). We sold all related machines and equipments to Taizhou Fuling and Zhejiang Great New Materials
Co., Ltd. (“Great NM”). Great NM is a company owned by direct relatives of Taizhou Fuling’s officials. We plan
to dissolve Great Plastics in the third quarter of 2019.
In
December 2018, the Company announced its plan to set up a manufacturing factory (the “Mexico Factory”) in Monterrey,
Mexico. In December 2018, the Company signed a building lease with Interpuerto Industrial Park in Monterrey, Mexico and
a service agreement with a local shelter service company to help with administrative, accounting, compliance, import/export, human
resources, etc., at the Mexico Factory. Factory remodeling is expected to start in April 2019, followed by equipment installation
and testing and worker recruitment in May. We expect that the first phase of the Mexico Factory will have an annual design capacity
of 10,000 tons and will be primarily used for producing paper straws and plastic straws and paper cups serving the U.S. market.
We expect to launch commercial production at the Mexico Factory around July 2019.
As
of March 10, 2019, our products are sold in 22 countries. Our customers now include Subway, Wendy’s, Burger King, Taco Bell,
KFC (China only), Wal-Mart, and McKesson.
In
2018, we supplied five of the six largest fast food restaurant chains in the United States, based on U.S. system-wide sales amount
as published by QSR Magazine. We estimate we supplied the following percentages of these customers’ products in the United
States in 2018. These percentages are management’s best estimates, based on orders from such customers and understanding
of other supplier relationships. Sales to these five customers amounted in the aggregate to 21.5% of our total revenues in the
year ended December 31, 2018.
Customer
|
|
Cutlery
|
|
|
Straws
|
|
|
Courtesy Cups
|
|
A
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
*
|
|
B
|
|
|
60
|
%
|
|
|
35
|
%
|
|
|
*
|
|
C
|
|
|
30
|
%
|
|
|
33
|
%
|
|
|
*
|
|
D
|
|
|
*
|
|
|
|
100
|
%
|
|
|
*
|
|
E
|
|
|
*
|
|
|
|
15
|
%
|
|
|
*
|
|
|
*
|
Less
than 1%; please note that these customers are presented in random order and not in order of size in order to protect the confidentiality
of the customers.
|
In
2017, we supplied five of the six largest fast food restaurant chains in the United States, based on U.S. system-wide sales amount
as published by QSR Magazine. We estimate we supplied the following percentages of these customers’ products in the United
States in 2017. These percentages are management’s best estimates, based on orders from such customers and understanding
of other supplier relationships. Sales to these five customers amounted in the aggregate to 23.6% of our total revenues in the
year ended December 31, 2017.
Customer
|
|
Cutlery
|
|
|
Straws
|
|
|
Courtesy Cups
|
|
A
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
*
|
|
B
|
|
|
60
|
%
|
|
|
35
|
%
|
|
|
*
|
|
C
|
|
|
30
|
%
|
|
|
33
|
%
|
|
|
*
|
|
D
|
|
|
*
|
|
|
|
100
|
%
|
|
|
*
|
|
E
|
|
|
*
|
|
|
|
15
|
%
|
|
|
*
|
|
|
*
|
Less
than 1%; please note that these customers are presented in random order and not in order of size in order to protect the confidentiality
of the customers.
|
In
2016, we supplied five of the six largest fast food restaurant chains in the United States, based on U.S. system-wide sales amount
as published by QSR Magazine. We estimate we supplied the following percentages of these customers’ products in the United
States in 2016. These percentages are management’s best estimates, based on orders from such customers and understanding
of other supplier relationships. Sales to these five customers amounted in the aggregate to 23.5% of our total revenues in the
year ended December 31, 2016.
Customer
|
|
Cutlery
|
|
|
Straws
|
|
|
Courtesy Cups
|
|
A
|
|
|
100
|
%
|
|
|
70
|
%
|
|
|
*
|
|
B
|
|
|
45
|
%
|
|
|
45
|
%
|
|
|
*
|
|
C
|
|
|
24
|
%
|
|
|
*
|
|
|
|
*
|
|
D
|
|
|
*
|
|
|
|
100
|
%
|
|
|
*
|
|
E
|
|
|
*
|
|
|
|
15
|
%
|
|
|
*
|
|
|
*
|
Less
than 1%; please note that these customers are presented in random order and not in order of size in order to protect the confidentiality
of the customers.
|
Revenue
by Geographic Area
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Region
|
|
Amount
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Amount
|
|
|
|
|
United States
|
|
$
|
118,308
|
|
|
|
85.32
|
%
|
|
$
|
106,564
|
|
|
|
85.79
|
%
|
|
$
|
92,730
|
|
|
|
90.63
|
%
|
Europe
|
|
$
|
6,622
|
|
|
|
4.78
|
%
|
|
$
|
6,101
|
|
|
|
4.91
|
%
|
|
$
|
3,173
|
|
|
|
3.10
|
%
|
Canada
|
|
$
|
1,636
|
|
|
|
1.18
|
%
|
|
$
|
1,944
|
|
|
|
1.57
|
%
|
|
$
|
982
|
|
|
|
0.96
|
%
|
China
|
|
$
|
8,286
|
|
|
|
5.98
|
%
|
|
$
|
7,741
|
|
|
|
6.23
|
%
|
|
$
|
3,839
|
|
|
|
3.75
|
%
|
Other Countries
|
|
$
|
3,812
|
|
|
|
2.75
|
%
|
|
$
|
1,859
|
|
|
|
1.50
|
%
|
|
$
|
1,597
|
|
|
|
1.56
|
%
|
Total
|
|
$
|
138,664
|
|
|
|
|
|
|
$
|
124,209
|
|
|
|
|
|
|
$
|
102,321
|
|
|
|
|
|
Factors
Affecting Our Results of Operations
Government
Policy May Impact our Business and Operating Results.
Our business and operating results will
be affected by China’s overall economic growth and government policy. Unfavorable changes in government policies (as well
as government policies affecting our customers) could affect the demand for our products and could materially and adversely affect
our results of operations. Our products are currently not subject to the government restrictions in the PRC. However, any future
changes in the government’s policy upon plastic related production industry or disposal rules may have a negative effect
on our business. As our majority of business is from international trading, any future changes in the government policy affecting
the importing and exporting industry may impact our revenue and profitability, such as the tariff policies.
World
crude oil prices may impact our profitability.
The
price of our products’ main raw material is closely associated with that of crude oil. Fluctuating oil prices impact not
only the cost of plastic resin, but also transportation costs. Normally, our customers and we mutually agree to adjust our price
according to raw material price fluctuation. However, if we are unable to do that in the future, oil price fluctuation will impact
our profitability.
The
fast food industry is expected to grow slowly.
Our
major customers operate in fast food industry in the U.S. The industry is expected to perform marginally better over the next
five years as the U.S. economy improves and consumers continue to seek convenient meal options. While no severe revenue declines
are expected, fast food restaurants will continue to operate in a slow-growth environment. Successful operators will need to adapt
to changing consumer preferences as the traditional concept of fast food evolves to include a wider variety of options. As plenty
of opportunities remain for new fast food concepts and products, the industry’s long era of growth is far from over. Over
the past five years, the Fast Food Restaurants in the US industry has grown by 3.8% to reach revenue of $256 billion in 2018.
Over the past five years, the Global Fast Food Restaurants industry has grown by 3.5% to reach revenue of $668 billion in 2018.
In addition, the demand for foodservice disposables in the U.S. is projected to increase 3.9% per year to $21.9 billion in 2019. Global
foodservice disposables market is expected to reach $82.1 billion by 2025.
Competition
is high and increasing.
The
three largest U.S. suppliers of foodservice disposables account for a significant percentage of the industry. As of 2012, Dart
Container Corporation, Reynolds Group/Pactiv and Georgia-Pacific collectively held approximately 29% of the U.S. market share
in the foodservice disposables industry. Our industry is marked by a small number of strong competitors, with approximately 50%
of our market controlled by the top 10 companies in the industry. In addition, larger companies tend to have more resources and
opportunities to deal with the higher tariffs on products and/or raw materials exported from China to U.S. Under such circumstances,
we may be unable to compete effectively against such larger, better-capitalized companies, which have well-established long-term
relationships with the large customers we serve and seek to serve. Competition in this industry is primarily based on price. Other
significant competitive factors are quality and reliability of delivery.
Exchange
rate fluctuations may significantly impact our business and profitability.
We
sell a majority of our products in the United States (approximately 85.3%, 85.8% and 90.5% based on the revenues for the year
ended December 31, 2018, 2017, and 2016). Historically, we have relied on lower wages and favorable exchange rates in China to
make our products sold abroad competitive in price. As China’s currency has fluctuated significantly against the U.S. dollar
in the past year, our advantage in price competitiveness might be impacted. While having already begun to diversify risk by moving
some of our manufacturing to the United States, we anticipate continuously producing the majority of our products in China. To
the extent the Chinese RMB appreciates, our products could become more expensive and, as a result, less attractive to potential
customers in other countries. Currently we do not have any foreign currency net investments which are hedged by currency borrowings
and other hedging instruments.
Results
of Operations
The
following table summarizes the results of our operations during the fiscal years ended December 31, 2018 and 2017, respectively,
and provides information regarding the dollar and percentage increase or (decrease) during such years.
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2018
|
|
|
2017
|
|
|
Amount
|
|
|
Percentage
|
|
Statement of Operations Data:
|
|
Amount
|
|
|
As % of Sales
|
|
|
Amount
|
|
|
As % of Sales
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
138,664
|
|
|
|
100
|
%
|
|
$
|
124,209
|
|
|
|
100
|
%
|
|
$
|
14,455
|
|
|
|
11.6
|
%
|
Cost of goods sold
|
|
|
108,914
|
|
|
|
79
|
%
|
|
|
98,077
|
|
|
|
79
|
%
|
|
|
10,837
|
|
|
|
11.0
|
%
|
Gross profit
|
|
|
29,750
|
|
|
|
21
|
%
|
|
|
26,132
|
|
|
|
21
|
%
|
|
|
3,618
|
|
|
|
13.8
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
7,830
|
|
|
|
6
|
%
|
|
|
6,835
|
|
|
|
6
|
%
|
|
|
995
|
|
|
|
14.6
|
%
|
G&A expenses
|
|
|
8,323
|
|
|
|
6
|
%
|
|
|
7,254
|
|
|
|
6
|
%
|
|
|
1,069
|
|
|
|
14.7
|
%
|
R&D expenses
|
|
|
3,431
|
|
|
|
2
|
%
|
|
|
2,953
|
|
|
|
2
|
%
|
|
|
478
|
|
|
|
16.2
|
%
|
Total operating expenses
|
|
|
19,584
|
|
|
|
14
|
%
|
|
|
17,042
|
|
|
|
14
|
%
|
|
|
2,542
|
|
|
|
14.9
|
%
|
Income from operations
|
|
|
10,166
|
|
|
|
7
|
%
|
|
|
9,090
|
|
|
|
7
|
%
|
|
|
1,076
|
|
|
|
11.84
|
%
|
Interest expense, net
|
|
|
(1,736
|
)
|
|
|
(1
|
)%
|
|
|
(924
|
)
|
|
|
(1
|
)%
|
|
|
(812
|
)
|
|
|
87.9
|
%
|
Subsidy income
|
|
|
1,706
|
|
|
|
1
|
%
|
|
|
1,012
|
|
|
|
1
|
%
|
|
|
694
|
|
|
|
68.6
|
%
|
Investment income
|
|
|
(9
|
)
|
|
|
0
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
(9
|
)
|
|
|
-
|
|
Foreign currency transaction gain (loss)
|
|
|
781
|
|
|
|
1
|
%
|
|
|
(175
|
)
|
|
|
0
|
%
|
|
|
956
|
|
|
|
(546.3
|
)%
|
Other income, net
|
|
|
66
|
|
|
|
0
|
%
|
|
|
51
|
|
|
|
0
|
%
|
|
|
15
|
|
|
|
29.4
|
%
|
Total other income (expenses)
|
|
|
808
|
|
|
|
1
|
%
|
|
|
(36
|
)
|
|
|
0
|
%
|
|
|
844
|
|
|
|
(2,344.4
|
)%
|
Income before income taxes
|
|
|
10,974
|
|
|
|
8
|
%
|
|
|
9,054
|
|
|
|
7
|
%
|
|
|
1,920
|
|
|
|
21.2
|
%
|
Provision for income taxes
|
|
|
1,127
|
|
|
|
1
|
%
|
|
|
788
|
|
|
|
1
|
%
|
|
|
339
|
|
|
|
43.0
|
%
|
Net income from continuing operations
|
|
$
|
9,847
|
|
|
|
7
|
%
|
|
$
|
8,266
|
|
|
|
7
|
%
|
|
$
|
1,581
|
|
|
|
19.1
|
%
|
Net loss from discontinued operations, net of tax
|
|
|
(88
|
)
|
|
|
0
|
%
|
|
|
(1,974
|
)
|
|
|
2
|
%
|
|
|
1,886
|
|
|
|
95.5
|
%
|
Net income
|
|
$
|
9,759
|
|
|
|
7
|
%
|
|
$
|
6,291
|
|
|
|
5
|
%
|
|
$
|
3,468
|
|
|
|
55.1
|
%
|
The
following table summarizes the results of our operations during the fiscal years ended December 31, 2017 and 2016, respectively,
and provides information regarding the dollar and percentage increase or (decrease) during such years.
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percentage
|
|
Statement of Operations Data:
|
|
Amount
|
|
|
As % of Sales
|
|
|
Amount
|
|
|
As % of Sales
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
124,209
|
|
|
|
100
|
%
|
|
$
|
102,321
|
|
|
|
100
|
%
|
|
$
|
21,888
|
|
|
|
21.4
|
%
|
Cost of goods sold
|
|
|
98,077
|
|
|
|
79
|
%
|
|
|
77,130
|
|
|
|
75
|
%
|
|
|
20,947
|
|
|
|
27.2
|
%
|
Gross profit
|
|
|
26,132
|
|
|
|
21
|
%
|
|
|
25,191
|
|
|
|
25
|
%
|
|
|
941
|
|
|
|
3.7
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
6,835
|
|
|
|
6
|
%
|
|
|
5,955
|
|
|
|
6
|
%
|
|
|
880
|
|
|
|
14.8
|
%
|
G&A expenses
|
|
|
7,254
|
|
|
|
6
|
%
|
|
|
6,277
|
|
|
|
6
|
%
|
|
|
977
|
|
|
|
15.6
|
%
|
R&D expenses
|
|
|
2,953
|
|
|
|
2
|
%
|
|
|
2,356
|
|
|
|
2
|
%
|
|
|
597
|
|
|
|
25.3
|
%
|
Total operating expenses
|
|
|
17,042
|
|
|
|
14
|
%
|
|
|
14,588
|
|
|
|
14
|
%
|
|
|
2,454
|
|
|
|
16.8
|
%
|
Income from operations
|
|
|
9,090
|
|
|
|
7
|
%
|
|
|
10,603
|
|
|
|
10
|
%
|
|
|
(1,513
|
)
|
|
|
(14.3
|
)%
|
Interest expense, net
|
|
|
(924
|
)
|
|
|
(1
|
)%
|
|
|
(562
|
)
|
|
|
(1
|
)%
|
|
|
(362
|
)
|
|
|
64.4
|
%
|
Subsidy income
|
|
|
1,012
|
|
|
|
1
|
%
|
|
|
1,647
|
|
|
|
2
|
%
|
|
|
(635
|
)
|
|
|
(38.6
|
)%
|
Foreign currency transaction gain (loss)
|
|
|
(175
|
)
|
|
|
0
|
%
|
|
|
57
|
|
|
|
0
|
%
|
|
|
(232
|
)
|
|
|
(407.0
|
)%
|
Other income, net
|
|
|
51
|
|
|
|
0
|
%
|
|
|
65
|
|
|
|
0
|
%
|
|
|
(14
|
)
|
|
|
(21.5
|
)%
|
Total other income (expenses)
|
|
|
(36
|
)
|
|
|
0
|
%
|
|
|
1,207
|
|
|
|
1
|
%
|
|
|
(1,243
|
)
|
|
|
(103.0
|
)%
|
Income before income taxes
|
|
|
9,054
|
|
|
|
7
|
%
|
|
|
11,810
|
|
|
|
12
|
%
|
|
|
(2,756
|
)
|
|
|
(23.3
|
)%
|
Provision for income taxes
|
|
|
788
|
|
|
|
1
|
%
|
|
|
1,561
|
|
|
|
2
|
%
|
|
|
(773
|
)
|
|
|
(49.5
|
)%
|
Net income from continuing operations
|
|
$
|
8,266
|
|
|
|
7
|
%
|
|
$
|
10,249
|
|
|
|
10
|
%
|
|
$
|
(1,983
|
)
|
|
|
(19.3
|
)%
|
Net loss from discontinued operations, net of tax
|
|
|
(1,974
|
)
|
|
|
2
|
%
|
|
|
(2,306
|
)
|
|
|
2
|
%
|
|
|
332
|
|
|
|
13.4
|
%
|
Net income
|
|
$
|
6,291
|
|
|
|
5
|
%
|
|
$
|
7,943
|
|
|
|
8
|
%
|
|
$
|
(1,652
|
)
|
|
|
(20.8
|
)%
|
Revenues.
Revenues increased by approximately $14.5
million, or 11.6%, to approximately $138.7 million in 2018 from approximately $124.2 million in 2017. The increase in revenues
was primarily driven by a 8.8% increase of sales volume and a 2.6% increase in blended average selling price.
Revenues
increased by approximately $21.9 million, or 21.4%, to approximately $124.2 million in 2017 from approximately $102.3 million
in 2016. The increase in revenues was primarily driven by a 15.4% increase of sales volume and a 5.1% increase in blended average
selling price.
Revenues
from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately $5.6 million,
$3.0 million, and $2.6 million, respectively and were included in net loss from discontinued operations.
Revenue
by Product Type in 2018 and 2017
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
|
Amount
|
|
|
% of
Sales
|
|
|
Amount
|
|
|
% of
Sales
|
|
|
Amount Increase (Decrease)
|
|
|
Percentage Increase (Decrease)
|
|
Cutlery
|
|
$
|
66,559
|
|
|
|
48
|
%
|
|
$
|
62,104
|
|
|
|
50
|
%
|
|
$
|
4,455
|
|
|
|
7
|
%
|
Straws
|
|
|
23,573
|
|
|
|
17
|
%
|
|
|
18,631
|
|
|
|
15
|
%
|
|
|
4,942
|
|
|
|
27
|
%
|
Cups and plates
|
|
|
37,439
|
|
|
|
27
|
%
|
|
|
33,537
|
|
|
|
27
|
%
|
|
|
3,902
|
|
|
|
12
|
%
|
Others
|
|
|
11,093
|
|
|
|
8
|
%
|
|
|
9,937
|
|
|
|
8
|
%
|
|
|
1,156
|
|
|
|
12
|
%
|
Total
|
|
$
|
138,664
|
|
|
|
100
|
%
|
|
$
|
124,209
|
|
|
|
100
|
%
|
|
$
|
14,455
|
|
|
|
12
|
%
|
Revenue
by Product Type in 2017 and 2016
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
|
|
Amount
|
|
|
% of
Sales
|
|
|
Amount
|
|
|
% of
Sales
|
|
|
Amount Increase (Decrease)
|
|
|
Percentage Increase (Decrease)
|
|
Cutlery
|
|
$
|
62,104
|
|
|
|
50
|
%
|
|
$
|
53,207
|
|
|
|
52
|
%
|
|
$
|
8,897
|
|
|
|
17
|
%
|
Straws
|
|
|
18,631
|
|
|
|
15
|
%
|
|
|
14,325
|
|
|
|
14
|
%
|
|
|
4,306
|
|
|
|
30
|
%
|
Cups and plates
|
|
|
33,537
|
|
|
|
27
|
%
|
|
|
27,627
|
|
|
|
27
|
%
|
|
|
5,910
|
|
|
|
21
|
%
|
Others
|
|
|
9,937
|
|
|
|
8
|
%
|
|
|
7,162
|
|
|
|
7
|
%
|
|
|
2,775
|
|
|
|
39
|
%
|
Total
|
|
$
|
124,209
|
|
|
|
100
|
%
|
|
$
|
102,321
|
|
|
|
100
|
%
|
|
$
|
21,888
|
|
|
|
21
|
%
|
Cutlery
Revenue
from cutlery increased by $4.5 million, or 7%, from $62.1 million in 2017 to $66.6 million in 2018. Sales volume of cutlery increased
3.0% or 0.9 million kilograms to 30.3 million kilograms. Average selling price for cutlery increased 4.1% or $0.09 per kilogram,
to $2.20 per kilogram for the year of 2018.
Revenue
from cutlery increased by $8.9 million, or 17%, from $53.2 million in 2016 to $62.1 million in 2017. Sales volume of cutlery increased
10.6% or 2.8 million kilograms to 29.4 million kilograms. Average selling price for cutlery increased 5.6% or $0.11 per kilogram,
to $2.11 per kilogram for the year of 2017.
Straws
Revenue
for straws increased by $4.9 million, or 27% in 2018 to $23.6 million compared with revenue of $18.6 million in 2017. In 2018,
the quantity sold increased by 1.6 million kilograms or 86.7% compared to that in 2017. The average selling price of straws decreased
by $3.23 per kilogram, or 32.2% to $6.80 per kilogram in 2018. By shifting more of our straw production from China to U.S. and
Mexico, we continued to improve our competitiveness and large QSR customers are looking to increase their purchases of straws
from us. We expect our sales volume will continue to increase in this category.
Revenue
for straws increased by $4.3 million, or 30% in 2017 to $18.6 million compared with revenue of $14.3 million in 2016. In 2017,
the quantity sold decreased by 0.3 million kilograms or 15.2% compared to that in 2016. The average selling price of straws increased
by $3.49 per kilogram, or 53.3% to $10.03 per kilogram in 2017. By shifting more of our straw production from China to U.S., we
continued to improve our competitiveness and large QSR customers are looking to increase their purchases of straws from us.
Our
Allentown factory began operation in 2015 and has been 100% devoted solely to straw manufacturing. In 2018, 2017 and 2016, the
Allentown factory manufactured 2,302,230 kilograms, 1,736,530 kilograms and 1,326,699 kilograms of straws respectively.
Great
Plastics specialized in straws production. The production that Great Plastics performed will be completely absorbed by Taizhou
Fuling and some may flow over to Mexico when it starts up.
Cups
and plates
Revenue
for cups and plates increased by $3.9 million, or 12% in 2018 to $37.4 million compared with revenue of $33.5 million in 2017.
Sales volume increased by 10.7% compared to 2017. The average selling price increased from $3.16 to $3.19 per kilogram. We will
continue to experience higher growth in this category as the market looks for substitutes for Styrofoam cups and plates which
we don’t make. Our more environmentally friendly products in paper and biodegradable plastic materials are the most popular
alternatives.
Revenue
for cups and plates increased by $5.9 million, or 21% in 2017 to $33.5 million compared with revenue of $27.6 million in 2016.
Sales volume increased by 31.1% compared to 2016. The average selling price decreased from $3.42 to $3.16 per kilogram. Growth
in this product category continues to look promising now that we have our fourth Chinese factory fully operational and there are
no more capacity constraints.
Other
products
Other
products include products for family use, party and other entertainment purposes.
Revenue
from other products increased by $1.2 million, or 12% in 2018 to $11.1 million compared with revenue of $9.9 million in 2017.
The revenue increase was mainly due to an increase of 9.7% in sales volume and a 1.7% increase in average selling price.
Revenue
from other products increased by $2.8 million, or 39% in 2017 to $9.9 million compared with revenue of $7.2 million in 2016. The
revenue increase was mainly due to an increase of 39.8% in sales volume and a 0.8% decrease in average selling price.
Revenue
by Geographic Area in 2018 and 2017
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2018
|
|
|
2017
|
|
|
Year-over Year Increase
|
|
Region
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount Increase (Decrease)
|
|
|
Percentage Increase (Decrease)
|
|
United States
|
|
$
|
118,308
|
|
|
|
85.3
|
%
|
|
$
|
106,564
|
|
|
|
85.8
|
%
|
|
$
|
11,744
|
|
|
|
11.0
|
%
|
Europe
|
|
|
6,622
|
|
|
|
4.8
|
%
|
|
|
6,101
|
|
|
|
4.9
|
%
|
|
|
521
|
|
|
|
8.5
|
%
|
China
|
|
|
8,286
|
|
|
|
6.0
|
%
|
|
|
7,741
|
|
|
|
6.2
|
%
|
|
|
545
|
|
|
|
7.0
|
%
|
Canada
|
|
|
1,636
|
|
|
|
1.2
|
%
|
|
|
1,944
|
|
|
|
1.6
|
%
|
|
|
(308
|
)
|
|
|
(15.8
|
)%
|
Others
|
|
|
3,812
|
|
|
|
2.7
|
%
|
|
|
1,859
|
|
|
|
1.5
|
%
|
|
|
1,953
|
|
|
|
105.1
|
%
|
Total
|
|
$
|
138,664
|
|
|
|
100.0
|
%
|
|
$
|
124,209
|
|
|
|
100.0
|
%
|
|
$
|
14,455
|
|
|
|
11.6
|
%
|
Revenue
by Geographic Area in 2017 and 2016
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2017
|
|
|
2016
|
|
|
Year-over Year Increase
|
|
Region
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount Increase (Decrease)
|
|
|
Percentage Increase (Decrease)
|
|
United States
|
|
$
|
106,564
|
|
|
|
85.8
|
%
|
|
$
|
92,730
|
|
|
|
90.6
|
%
|
|
$
|
13,834
|
|
|
|
14.9
|
%
|
Europe
|
|
|
6,101
|
|
|
|
4.9
|
%
|
|
|
3,173
|
|
|
|
3.1
|
%
|
|
|
2,928
|
|
|
|
92.3
|
%
|
China
|
|
|
7,741
|
|
|
|
6.2
|
%
|
|
|
3,839
|
|
|
|
3.8
|
%
|
|
|
3,902
|
|
|
|
101.6
|
%
|
Canada
|
|
|
1,944
|
|
|
|
1.6
|
%
|
|
|
982
|
|
|
|
1.0
|
%
|
|
|
962
|
|
|
|
98.0
|
%
|
Others
|
|
|
1,859
|
|
|
|
1.5
|
%
|
|
|
1,597
|
|
|
|
1.6
|
%
|
|
|
262
|
|
|
|
16.4
|
%
|
Total
|
|
$
|
124,209
|
|
|
|
100.0
|
%
|
|
$
|
102,321
|
|
|
|
100.0
|
%
|
|
$
|
21,888
|
|
|
|
21.4
|
%
|
Our
sales from the United States market grew significantly in 2018. It increased $11.7 million or 11.0% from $106.6 million in 2017
to $118.3 million in 2018. While this demonstrated steady growth in the U.S. market, we continued to encounter strong competition
especially in the wholesale distribution channel where everyone shops for lower prices from Chinese importers. Our business with
QSR customers continued to experience strong growth due to our U.S. manufacturing capability.
Our
sales from the United States market grew significantly in 2017. It increased $13.8 million or 14.9% from $92.7 million in 2016
to $106.6 million in 2017. While this demonstrated steady growth in the U.S. market, we continued to encounter strong competition
especially in the wholesale distribution channel where everyone shops for lower prices from Chinese importers. Our business with
QSR customers continued to experience strong growth due to our U.S. manufacturing capability.
Europe, China, and others markets all grew
more than 7% in 2018. The Chinese market overtook the European market and became our second largest market in 2016. Sales from
the Chinese market increased by $0.5 million, or 7.0% from 2017 to 2018, and by $3.9 million, or 101.6% from 2016 to 2017 due to
the significant increase of the fast food market in China. As the Chinese fast food industry and consumer dining out behavior are
catching up with the U.S. standards, our type of higher quality plastic and paper disposable serviceware products will be in increasing
demand.
Cost
of goods sold.
Our
cost of goods sold increased by approximately $10.8 million or 11.0% to approximately $108.9 million in 2018 from approximately
$98.1 million in 2017, which is consistent with sales growth in 2018. As a percentage of revenues, the cost of goods sold kept
stable as 79.0% in 2018.
Our
cost of goods sold increased by approximately $20.9 million or 27.2% to approximately $98.1 million in 2017 from approximately
$77.1 million in 2016, which is consistent with sales growth in 2017. As a percentage of revenues, the cost of goods sold increased
by approximately 3.6% point to 79.0% in 2018 from 75.4% in 2017. Higher oil prices led to increased raw material cost in the early
part of 2017 and we were not able to completely pass on the increase to customers as the U.S. market is very competitive. By the
time the market reacted to the increase and willing to accept it, oil prices declined back down and took away our rationale to
increase. In addition, labor cost continued to rise in China putting pressure on gross margin. Our new factory should help us
alleviate that going forward due to its advanced automation and higher efficiency, thus relying less on manual labor.
Cost
of goods sold from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately
$7.6 million, $3.1 million, and $2.5 million, respectively and were included in net loss from discontinued operations.
The
portion of our products produced by third-party manufacturers in the years ended December 31, 2018, 2017 and 2016 were less than
1%. The associated impact on our gross margins is very limited considering the portion.
Gross
profit.
Our
gross profit increased by approximately $3.6 million, or 13.8%, to approximately $29.8 million in 2018 from approximately
$26.1 million in 2017. Gross profit margin was 2
1.5
% in 2018, as compared with 21.0% in 2017. The increase of 0
.5
% point was
primarily attributable to lowered raw material unit cost, and higher average selling price, offset by increased labor cost.
Oil prices started to decrease from middle 2018 and decreased oil prices led to decreased raw material cost in
2018.
Our gross profit increased by approximately
$0.9 million, or 3.7%, to approximately $26.1 million in 2017 from approximately $25.2 million in 2016. Gross profit margin was
21.0% in 2017, as compared with 24.6% in 2016. The decrease of 3.6% point was primarily attributable to higher raw material cost
and labor cost, partially offset by higher average selling price. Continued from the oil price increase at the end of 2016, raw
material prices in the first quarter of 2017 remained high, as well as transportation costs. We were unable to implement a price
increase until deep into the second quarter but by that time, oil prices went back down. We had less support to raise prices while
plastic resin prices remain higher for the most part of the year. Our price increases were not sufficient to offset our increase
in costs.
Our
gross profit from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately
$(2.0) million, $(0.08) million, and $0.05 million, respectively and were included in net loss from discontinued operations.
Our
cost and gross profit by product types for fiscal year 2018 and 2017 are as follows:
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
|
Cost
|
|
|
Gross Profit %
|
|
|
Cost
|
|
|
Gross Profit %
|
|
|
Cost Increase (Decrease)
|
|
|
Gross Profit % Increase (Decrease)
|
|
Cutlery
|
|
$
|
55,546
|
|
|
|
16.5
|
%
|
|
$
|
52,291
|
|
|
|
15.8
|
%
|
|
$
|
3,255
|
|
|
|
6.2
|
%
|
Straws
|
|
|
19,605
|
|
|
|
16.8
|
%
|
|
|
15,670
|
|
|
|
15.9
|
%
|
|
|
3,935
|
|
|
|
25.1
|
%
|
Cups and plates
|
|
|
25,050
|
|
|
|
33.1
|
%
|
|
|
22,355
|
|
|
|
33.3
|
%
|
|
|
2,695
|
|
|
|
12.1
|
%
|
Others
|
|
|
8,277
|
|
|
|
25.4
|
%
|
|
|
7,290
|
|
|
|
26.6
|
%
|
|
|
987
|
|
|
|
13.5
|
%
|
Tax
|
|
|
436
|
|
|
|
N/A
|
|
|
|
471
|
|
|
|
N/A
|
|
|
|
(35
|
)
|
|
|
N/A
|
|
Total
|
|
$
|
108,914
|
|
|
|
21.5
|
%
|
|
$
|
98,077
|
|
|
|
21.0
|
%
|
|
$
|
10,837
|
|
|
|
11.1
|
%
|
Cost
of revenue for cutlery products increased by approximately $3.3 million to approximately $55.5 million in 2018 compared to $52.3
million in 2017. Gross profit margin was 16.5
%
and 15.8%, respectively in 2018 and 2017. Gross margin increased due to a 4.1%
increase in average selling price offset by a 0.3% increase in unit cost. Cutlery represented the largest portion of sales at
48%.
Cost
of revenue for straws was approximately $19.6 million in 2018 compared to approximately $15.7 million in 2017. The gross profit
margin was approximately 16.8% in 2018 compared to 15.9% in 2017. The gross margin increased because average selling price declined
32% while unit cost declined 35%. Straw is a low margin product but we are gaining market share especially in the Quick Service Restaurants (“QSR”) segment
due to our manufacturing in the U.S. and price competitiveness. We are improving efficiency at our U.S. operation and lowering
manufacturing unit cost. It is an important product to lead into selling other product categories in the QSR segment.
Cost
of revenue for cups and plates was around $
25.1
million and $22.4 million in 2018 and 2017, respectively. Gross profit margin
was 33.1
%
in 2018 compared to 33.3% in 2017. Average selling price increased 1% and unit cost declined 2% in 2018. Cups and plates
remained our highest gross margin product category and we plan to focus on growing this category by engineering new product designs
and developing new materials that would improve profit margin.
Our
cost and gross profit by product types for fiscal year 2017 and 2016 are as follows:
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
|
|
Cost
|
|
|
Gross Profit %
|
|
|
Cost
|
|
|
Gross Profit %
|
|
|
Cost Increase (Decrease)
|
|
|
Gross Profit % Increase (Decrease)
|
|
Cutlery
|
|
$
|
52,291
|
|
|
|
15.8
|
%
|
|
$
|
43,729
|
|
|
|
17.8
|
%
|
|
$
|
8,562
|
|
|
|
(2.0
|
)%
|
Straws
|
|
|
15,670
|
|
|
|
15.9
|
%
|
|
|
11,204
|
|
|
|
21.8
|
%
|
|
|
4,466
|
|
|
|
(5.9
|
)%
|
Cups and plates
|
|
|
22,355
|
|
|
|
33.3
|
%
|
|
|
16,818
|
|
|
|
39.1
|
%
|
|
|
5,537
|
|
|
|
(5.8
|
)%
|
Others
|
|
|
7,290
|
|
|
|
26.6
|
%
|
|
|
5,043
|
|
|
|
29.6
|
%
|
|
|
2,247
|
|
|
|
(3.0
|
)%
|
Tax
|
|
|
471
|
|
|
|
N/A
|
|
|
|
335
|
|
|
|
N/A
|
|
|
|
136
|
|
|
|
N/A
|
|
Total
|
|
$
|
98,077
|
|
|
|
21.0
|
%
|
|
$
|
77,129
|
|
|
|
24.6
|
%
|
|
$
|
20,948
|
|
|
|
(3.6
|
)%
|
Cost
of revenue for cutlery products increased by approximately $8.6 million to approximately $52.3 million in 2017 compared to $43.7
million in 2016. Gross profit margin was 15.8% and 17.8%, respectively in 2017 and 2016. Gross margin decreased due to a 8% increase
in unit cost partially offset by a 6% increase in average selling price. Price increases were delayed due to market competition
and the magnitude was not sufficient to offset increase in material costs. Cutlery represented the largest portion of sales at
50%.
Cost
of revenue for straws was approximately $15.7 million in 2017 compared to approximately $11.2 million in 2016. The gross profit
margin was approximately 15.9% in 2017 compared to 21.8% in 2016. The gross margin decreased because average selling price increased
53% while unit cost rose 65%. Straw is a low margin product but we are gaining market share especially in the QSR segment due
to our manufacturing in the U.S. and price competitiveness. We are improving efficiency at our U.S. operation and lowering manufacturing
unit cost. It is an important product to lead into selling other product categories in the QSR segment.
Cost
of revenue for cups and plates was around $22.4 million and $16.8 million in 2017 and 2016, respectively. Gross profit margin
was 33.3% in 2017 compared to 39.1% in 2016. Average selling price declined 7% and unit cost increased 1% in 2017. Cups and plates
remained our highest gross margin product category and we plan to focus on growing this category by engineering new product designs
and developing new materials that would improve profit margin.
Taxes
included in costs represent the VAT paid for purchased inventory, which cannot be deducted to offset our sales tax. The amount
of tax in costs can vary year to year depending on the timing and amount of purchases made throughout the year.
Selling
expenses.
Selling
expenses increased by approximately $995,000, or 14.6% to approximately $7.8
million
in 2018 compared to approximately $6.8 million in 2017. As a percentage of sales, our selling expenses were 5.6% and 5.5% in 2018
and 2017, respectively. The increase in selling expenses is consistent with the increase of revenues.
Selling
expenses increased by approximately $880,000, or 14.8% to approximately $6.8 million in 2017 compared to approximately $6.0 million
in 2016. As a percentage of sales, our selling expenses were 5.5% and 5.8% in 2017 and 2016, respectively. The increase in selling
expenses is consistent with the increase of revenues.
Selling
expenses from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately
$496,000, $786,000, and $902,000, respectively and were included in net loss from discontinued operations.
General
and administrative expenses.
Our general and administrative expenses
increased by approximately $1.1 million or 14.7%, to approximately $8.3 million in 2018 from approximately $7.3 million in 2017.
As a percentage of revenues, general and administrative expenses were 6.0% and 5.8% in 2018 and 2017, respectively. The level
of general and administrative expenses increase was normal based on our substantial increase in business. We were able to keep
administrative expense increase to a minimum to generate more operating profits.
Our
general and administrative expenses increased by approximately $1.0 million or 15.6%, to approximately $7.3 million in 2017 from
approximately $6.3 million in 2016. As a percentage of revenues, general and administrative expenses were 5.8% and 6.1% in 2017
and 2016, respectively. The level of general and administrative expenses increase was normal based on our substantial increase
in business. We were able to keep administrative expense increase to a minimum to generate more operating profits.
Our
general and administrative expenses from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017
and 2016 were approximately $750,000, $627,000, and $1,234,000, respectively and were included in net loss from discontinued operations.
Research
and development expenses
.
Our
research and development expenses increased approximately $478,000, or 16.2% to approximately $3.4 million in 2018 compared with
approximately $3.0 million in 2017. We expect to increase our R&D expenditures proportionate to our revenue increase, as we
continue to conduct research and development activities, especially seeking to increase the use of environmentally-friendly materials,
develop biodegradable materials and reduce reliance on fossil-based raw materials
.
Our
research and development expenses increased approximately $598,000, or 25.4% to approximately $3.0 million in 2017 compared with
approximately $2.4 million in 2016. We expect to increase our R&D expenditures proportionate to our revenue increase, as we
continue to conduct research and development activities, especially seeking to increase the use of environmentally-friendly materials,
develop biodegradable materials and reduce reliance on fossil-based raw materials
.
Our
research and development expense from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and
2016 were approximately $0, $ 0, and $0, respectively and were included in net loss from discontinued operations.
Interest
income (expense).
Our
net interest expense increased by approximately $0.8 million to approximately $1.7 million in 2018, from approximately $0.9 million
in 2017.
Our net interest expense increased by approximately
$0.3 million to approximately $0.9 million in 2017, from approximately $0.6 million in 2016.
Our
net interest expense from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were
approximately $105,000, $183,000, and $211,000, respectively and were included in net loss from discontinued operations.
The
average interest rates for our average outstanding loans in 2018, 2017 and 2016 were 4.89%, 5.07% and 4.37%, respectively. At
the time of an initial loan application, different commercial banks determine loan interest rates based on various factors, including
general economic conditions in China, internal bank lending policies, the applicant’s credit standing and relative bargaining
power. For the year ended December 31, 2018, 2017 and 2016, People’s Bank of China has kept its prevailing interest rate
at 4.3%
The
bank loan balances as of December 31, 2018, 2017 and 2016 were $19.9 million, $27.4 million and $15.1 million respectively. The
average amounts of loan outstanding for 2018, 2017 and 2016 were $23.7 million, $21.3 million and $13.0 million, respectively.
We borrow from commercial banks based on our working capital conditions and forecast of business needs. The average amount of
loan outstanding in 2018 was higher than 2017 due to expansion of our business. The average amount of loan outstanding in 2017
was higher than 2016 due to expansion of our business.
There
is no interest expense associated with notes payable but we are subject to a bank charge. The bank charge is usually 0.05% of
the notes payable issued. For the years ended December 31, 2018, 2017 and 2016, bank charges related to notes payable were immaterial.
Subsidy
income
.
Our government subsidy income was approximately $1.7 million in 2018 compared to approximately $1.0
million in 2017. Our government subsidy income was approximately $1.0 million in 2017 compared to approximately $1.6 million in
2016. Our government subsidy income was all granted by local governments in recognizing our achievements in various areas. All
subsidies we received in 2018, 2017 and 2016 were one-time grants and may not occur again in the future. We cannot predict the
likelihood or amount of any future subsidies.
Our
government subsidy income from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016
were approximately $39,000, $31,000, and $217,000, respectively and were included in net loss from discontinued operations.
Other
income (expense).
Other
income was approximately $66,000 and $52,000 in 2018 and 2017, respectively. The significant increase is attributed to increased
income from disposal of property, plant, and equipment in 2018.
Other
income was approximately $52,000 and $65,000 in 2017 and 2016, respectively. The significant decrease is attributed to increased
loss from disposal of property, plant, and equipment in 2017.
Other
expense from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016 were approximately
$407,000, $(71,000), and $218, respectively and were included in net loss from discontinued operations.
Foreign
currency translation gain (loss).
The Company recorded $0.8 million, $(0.2) million and $0.1 million of foreign currency
translation gain in 2018, 2017 and 2016, respectively.
Income
before income taxes.
Our
income before income taxes was approximately $10.9 million in 2018, an increase of approximately $1.9 million or 21.2% compared
with approximately $9.1 million in 2017. The increase was primarily attributable to increased sales, increased gross margin, increased
subsidy income, offset by increased cost of goods sold, increased operating expense, and increased interest expenses as discussed
above.
Our
income before income taxes was approximately $9.1 million in 2017, a decrease of approximately $2.7 million or 23.3% compared
with approximately $11.8 million in 2016. The decrease was primarily attributable to increased sales and gross margin offset by
increased cost of goods sold, increased operating expense, and decreased subsidy income as discussed above.
Our
income before income taxes from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016
were approximately $(2.8) million, $(1.9) million, and $(1.8) million, respectively and were included in net loss from discontinued
operations.
Provision
for income taxes.
Our
provision for income taxes was approximately $1.1 million in 2018, an increase of approximately $0.3 million or 42.9% from approximately
$0.8 million in 2017. The increase was due to the fact that more taxable income was generated from our Chinese subsidiaries compared
to 2017. In 2018, taxable income generated from China was $13.3 million compared to $8.7 million in 2017.
Our
provision for income taxes was approximately $0.8 million in 2017, a decrease of approximately $1.2 million or 49.5% from approximately
$1.6 million in 2016. The decrease was due to the fact that less taxable income was generated from our Chinese subsidiaries compared
to 2016. In 2017, taxable income generated from China was $8.7 million compared to $15.1 million in 2016.
Our
provision for income taxes from Great Plastics (our discontinued business) for the years ended December 31, 2018, 2017 and 2016
were approximately $221,000, $36,000, and $469,000, respectively and were included in net loss from discontinued operations.
B.
Liquidity and Capital Resources
We
are a holding company incorporated in the Cayman Islands. Total Faith, our BVI organized wholly owned subsidiary, owns Taizhou
Fuling which in turn owns our U.S. and China assets through its subsidiaries. We may need dividends and other distributions on
equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to
pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and
regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of their respective registered capital.
Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare
and bonus funds at their discretion. These reserves are not distributable as cash dividends. We have relied on direct payments
of expenses by our subsidiaries (which generate revenues), to meet our obligations to date. To the extent payments are due in
U.S. dollars, we have occasionally paid such amounts in RMB to an entity controlled by our management capable of paying such amounts
in U.S. dollars. Such transactions have been made at prevailing exchange rates and have resulted in immaterial losses or gains
on currency exchange but no other profit.
Construction in progress represents costs
of construction incurred for the Company’s new plant and equipment. The Company started the first phase of the construction
for its facility expansion in China (“Phase I”) in April 2016 in China. For the year ended December 31, 2017, construction
in progress of approximately $19.3 million was completed and was transferred to property, plant and equipment for Phase I.
In the beginning of August 2017, the Company started its second phase of the construction for its facility
expansion in China (“Phase II”). Phase II includes construction of a new plant, an office building and two dormitory
buildings. The construction is expected to be completed before the end of 2019 and the total construction cost of Phase II
is expected to be $13.1 million. For the year ended December 31, 2018, construction in progress of approximately $9.9 million
was completed and was transferred to property, plant and equipment for Phase II. The Company expects to fulfill the payments using
cash generated from operating activities and additional loans borrowed from local banks in case any shortage of cash on hand in
the future.
As of December 31, 2018, we had no purchase
commitments for construction and machinery purchase. These commitments represent the amount of agreements signed but not yet paid.
As
of December 31, 2018 and 2017, we had outstanding loans of approximately $27.1 million and $29.2 million from various banks
and entities, respectively. To secure this debt, we have pledged some of its properties and machinery, equipment, land use
rights as well as other assets in China to several banks. Approximately $1.7 million and $1.7 million worth of equipment was
used as collateral for the loan from Pennsylvania Industrial Development Authority as of December 31, 2018 and 2017,
respectively.
Further,
although instruments governing the current debts incurred by our PRC subsidiaries do not have restrictions on their abilities
to pay dividend or make other payments to us, the lender may impose such restriction in the future. As a result, our ability to
distribute dividends largely depends on earnings from our PRC subsidiaries and their ability to pay dividends out of their earnings.
We cannot assure you that our PRC subsidiaries will generate sufficient earnings and cash flows in the near future to pay dividends
or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.
As
of December 31, 2018 and 2017, we had cash and cash equivalents of approximately $4.4 million and $4.1 million, respectively and
restricted cash of approximately $2.4 million and $3.8 million, respectively. As of December 31, 2018, we also had certificates
of deposits of $0 million which will mature in December 2018. As of December 31, 2017, we had certificates of deposits of $0.1
million which matured in December 2018. We did not have any other short-term investments. As of December 31, 2018, Our current
assets were approximately $59.5 million, and our current liabilities were approximately $47.5 million, which resulted in a current
ratio of 1.25:1. Total FGI’s equity as of December 31, 2018 was approximately $64.7 million. As of December 31, 2017, our
current assets were approximately $57.0 million, and our current liabilities were approximately $55.56 million, which resulted
in a current ratio of 1.03:1. Total FGI’s equity as of December 31, 2017 was approximately $57.8 million.
We
have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital
from shareholders. Presently, our principal sources of liquidity are generated from our operations, proceeds from our initial
public offering and loans from commercial banks. In China, long-term loans are generally available; however, short-term loans
are a more readily accessible source of financing. Long-term loans in China are usually approved by banks for capital expenditures
only, such as fixed asset construction or property acquisitions. Our working capital requirements are influenced by the level
of our operations, the numerical volume and dollar value of our sales contracts, the progress of execution on our customer contracts,
and the timing of accounts receivable collections.
Based
on our current operating plan, we believe that our existing resources, including cash generated from operations, proceeds from
our initial public offering, bank loans, bank notes payable, and advances from suppliers will be sufficient to meet our working
capital requirement for our current operations over the next twelve months. We expect to be able to refinance our short-term loans
based on past experience and our good credit history. We do not believe failure to refinance our short term loans from certain
banks will have a significant negative impact on our normal business operations. Our related parties including our major shareholders
and affiliate companies are willing to provide us financial support. Although our operating cash flow was positive in 2018, 2017
and 2016, it is possible for us to have negative cash flow in the future, and for our related parties to be unable or unwilling
to provide us financial support as needed. If this happened, the failure to refinance our short-term loans could potentially affect
our capital expenditure and expansion of business.
During
the period from January 1, 2019 to March 30, 2019, we repaid approximately $5.2 million bank loans and $1.8 million notes payable
that become due. We also borrowed approximately $7.4 million bank loans as well as approximately $2.0 million notes payable from
various banks in China. All the loans and notes payable are short term in nature and guaranteed by its shareholders, related parties
and third parties. If we cannot refinance from commercial banks, our major shareholders and affiliate companies could provide
us financial support as needed. Lack of sufficient financial support from local banks or our related parties could potentially
affect our capital expenditure and expansion of business. We do not believe failure to refinance from certain banks will have
significant negative impact on our normal business operations.
The
following table sets forth summary of our cash flows from continuing operations for the periods indicated:
(All
amounts in thousands of U.S. dollars)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
11,577
|
|
|
$
|
2,474
|
|
|
$
|
5,145
|
|
Net cash used in investing activities
|
|
|
(8,732
|
)
|
|
|
(14,346
|
)
|
|
|
(23,648
|
)
|
Net cash provided by financing activities
|
|
|
(2,772
|
)
|
|
|
13,838
|
|
|
|
7,980
|
|
Effect of exchange rate changes on cash
|
|
|
(1,147
|
)
|
|
|
(356
|
)
|
|
|
(401
|
)
|
Net (decrease) increase in cash
|
|
|
(1,074
|
)
|
|
|
1,610
|
|
|
|
(10,924
|
)
|
Cash, beginning of year
|
|
|
7,871
|
|
|
|
6,261
|
|
|
|
17,185
|
|
Cash, end of year
|
|
$
|
6,797
|
|
|
$
|
7,871
|
|
|
$
|
6,261
|
|
Operating
Activities
Net
cash provided by operating activities was approximately $11.6 million in 2018, an increase of $9.1 million compared to cash provided
by operating activities of approximately $2.5 million in 2017. The increase in net cash provided by operating activities was primarily
attributable to the following factors:
|
●
|
Accounts
receivable increased $5.5 million in 2018, compared with increase of $2.4 million in 2017. The increase in account receivable
balance corresponded to the trend of increase in sales. Our sales increased by 11.6% or $14.5 million in 2018 compared with
2017.
|
|
●
|
Accounts
payable increased by $5.2 million in 2018, compared with a decrease of $2.3 million in 2017. The increase was primarily financed
by increase in long term borrowings and increased purchase of inventory during 2018 for locking a lower purchase price of raw material.
|
Net
cash provided by operating activities was approximately $2.5 million in 2017, a decrease of $2.7 million compared to cash provided
by operating activities of approximately $5.2 million in 2016. The decrease in net cash provided by operating activities was primarily
attributable to the following factors:
|
●
|
Accounts
receivable increased $2.4 million in 2017, compared with increase of $6.7 million in 2016. The increase in account receivable
balance corresponded to the trend of increase in sales. Our sales increased by 31.3% or $27.1 million in 2017 compared with 2016.
|
|
●
|
Accounts
payable decreased by $2.3 million in 2017, compared with an increase of $5.5 million in 2016. The decrease was primarily due to
more inventory purchase in 2016.
|
Investing
Activities
Net
cash used in investing activities was approximately $8.7 million in 2018, a decrease of approximately $5.6 million from net cash
used in investing activities of approximately $14.3 million in 2017. The decrease in net cash used in investing activities in
2018 was primarily attributable to less spending associated with the construction in progress in 2018 compared to 2017 because
the Phase II construction is expected to be completed soon, and the cash receipt from disposal of Great Plastics property and equipment
in 2018.
Net
cash used in investing activities was approximately $14.3 million in 2017, a decrease of approximately $9.3 million from net cash
used in investing activities of approximately $23.6 million in 2016. The decrease in net cash used in investing activities in
2017 was primarily attributable to less spending associated with the construction in progress in 2017 compared to 2016, as well
as a payment made in 2016 for land use rights for $8.3 million that didn’t recur in 2017.
Financing
Activities
Net
cash used in financing activities was approximately $2.8 million in 2018, compared to approximately $13.9 million net cash provided
from financing activities in 2017. The decrease in net cash provided from financing activities in 2018 was primarily attributable
to in 2018 the Company made repayments from short term borrowings of $39.6 million and in 2017 the Company made repayments of
short term borrowings of $20.3 million.
The Company repaid all outstanding borrowings and bank notes payable of Great Plastics in 2018 as
the Company plans to dissolve Great before the end of 2019.
Net
cash provided from financing activities was approximately $13.9 million in 2017, compared to approximately $8.0 million in 2016.
The increase in net cash provided from financing activities in 2017 was primarily attributable to more proceeds from short term
borrowings in 2017 compared with 2016. In 2017 the Company had proceeds from short term borrowings of $31.2 million and in 2016
the Company has proceeds from short term borrowings of $23.7 million.
In
2016, we used capital expenditures primarily to develop a new factory in Wenling and continue to equip our Allentown facility.
In 2017 and 2018, we continued our capital expenditures in constructing Phase II of our new Wenling factory including purchasing
machinery and equipment. Our material cash requirements in 2019 may include (i) investments of approximately $5.8 million in the
new production lines and the construction of manufacturing facilities in our new factory in China; (ii) purchase of equipment
and renovation of the factory for approximately $3.0 million for the Mexico factory. If the demand for our products is expected
to grow in the coming years, we may need to add additional manufacturing capacity in Wenling, China and in Allentown factory.
Our
primary source of cash is currently generated from the sales of our products and bank borrowings in addition to proceeds from
our initial public offering. In the coming years, we will be looking to other sources, such as raising additional capital by issuing
shares of stock, to meet our cash needs. While facing uncertainties in regards to the size and timing of capital raises, we are
confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities
and bank borrowings, as necessary.
Loan
Facilities
Short-term
Borrowings
As
of December 31, 2018, the details of all our short-term bank loans are as follows:
(All
amounts in U.S. dollars)
|
|
|
|
As of
|
|
|
|
|
|
December 31,
2018
|
|
Agricultural Bank of China (“ABC”)
|
|
(1)
|
|
$
|
8,622,194
|
|
China Merchants Bank (“CMB”)
|
|
(2)
|
|
|
1,696,441
|
|
Industrial and Commercial Bank of China (“ICBC”)
|
|
(3)
|
|
|
4,557,315
|
|
Bank of China (“BOC”)
|
|
(4)
|
|
|
2,724,793
|
|
East West Bank (“EWB”)
|
|
(5)
|
|
|
2,000,000
|
|
Postal Savings Bank of China (“PSBC”)
|
|
(6)
|
|
|
-
|
|
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “long-term borrowing” below)
|
|
|
|
|
89,898
|
|
East West Bank loan – current portion of long-term borrowing (see “long-term borrowing” below)
|
|
|
|
|
200,000
|
|
Total
|
|
|
|
$
|
19,890,641
|
|
(1)
|
During
the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term
bank loan agreements with ABC for a total amount of $8,622,194. The terms of these loans
are six months with variable interest rates based on the prevailing interest rates, respectively.
The effective rates are from 4.57% to 5.15% per annum.
These
loans were guaranteed by the assets of a third party guaranty company and a shareholder of the Company. The third party
guaranty company charges 2% of total loan amount.
|
|
(2)
|
During
year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank borrowing agreements with CMB for a total
amount of approximately $6.3 million (RMB 43.4 million). The terms of these loans are five to twelve months with variable interest
rates based on the prevailing interest rates. The effective rates were from 2.40% to 6.09% per annum. The loans are guaranteed
by Special Plastics and Taizhou Fuling’s general manager and Chair of the Board. As of December 31, 2018, $4,586,234 had
been repaid in full upon maturity.
|
|
(3)
|
During
the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount
of $4,557,315. The terms of these loans are five to twelve months with the interest rates ranged from 3.47% to 5.44% per annum.
|
|
(4)
|
During
the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank borrowing agreements and other financing
agreements with BOC. The terms of the loans are three to twelve months, with fixed interest rates based on London InterBank Offered
Rate (“LIBOR”) (for loans dominated in USD) or prime loan rates issued by People’s Bank of China (for loans
dominated in RMB), plus certain base points. The effective interest rates vary from 3.30% to 5.01% per annum. The loans to Taizhou
Fuling are guaranteed by the Chief Executive Officer (“CEO”).
|
|
(5)
|
On
March 9, 2017, Direct Link entered into a line of credit agreement with East West Bank for $2,000,000 for one year. The annual
interest rate is equivalent to LIBOR rate plus 2.75%. Direct Link was required to make restricted deposit of $41,900 for one year
(which was released in June 2018) with an initial interest rate of 3.76% per annum. The line of credit is guaranteed by FGI. The
agreements require Direct Link to comply with certain financial covenants and ratios, including maintaining but not limited to
minimum debt service coverage ratio of 1.40 times and to maintain maximum total debt to equity ratio of 3.0 times. Direct Link
will be measured semi-annually at June 30th and December 31st. Direct Link was not in compliance as of December 31, 2018.
On April 7, 2017, Direct Link drew down $1,500,000 with the effective rate of 3.86% per annum. On December 1, 2017, Direct
Link drew down another $500,000 with the effective rate of 4.45% per annum. Interest expense incurred on this loan for the
year ended December 31, 2018 and 2017 were $47,955 and $14,942, respectively. On March 14, 2018, East West Bank approved to extend
the loan to June 9, 2018. On June 26, 2018, East West Bank again approved to extend the loan to June 9, 2019. East West Bank waived
financial covenant violations as at December 31, 2018.
|
(6)
|
In
January 2018, Taizhou Fuling entered into a short-term bank loan agreement with PSBC
for $987,881. The terms of the loan are twelve months. The effective rates are 2.95%
per annum. As of December 31, 2018, this loan had been repaid prior to its maturity.
|
As
of December 31, 2018, land use rights in the amount of $7,821,842 and property and buildings in the amount of $14,071,515 were
pledged for all the above loans.
As
of December 31, 2017, the details of all our short-term bank loans are as follows:
(All
amounts in U.S. dollars)
|
|
|
|
As of
|
|
|
|
|
|
December 31,
2017
|
|
Agricultural Bank of China (“ABC”)
|
|
(1)
|
|
$
|
11,831,148
|
|
China Merchants Bank (“CMB”)
|
|
(2)
|
|
|
3,073,424
|
|
Industrial and Commercial Bank of China (“ICBC”)
|
|
(3)
|
|
|
4,019,908
|
|
Bank of China (“BOC”)
|
|
(4)
|
|
|
2,274,333
|
|
East West Bank (“EWB”)
|
|
(5)
|
|
|
2,000,000
|
|
Postal Savings Bank of China (“PSBC”)
|
|
(6)
|
|
|
4,046,597
|
|
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “long-term borrowing” below)
|
|
|
|
|
88,339
|
|
East West Bank loan – current portion of long-term borrowing (see “long-term borrowing” below)
|
|
|
|
|
83,333
|
|
Total
|
|
|
|
$
|
27,417,082
|
|
(1)
|
During
fiscal year 2017, Taizhou Fuling entered into a series of short-term bank loan agreements
with ABC for a total amount of $11,831,148. The terms of these loans are six to twelve
months with variable interest rates based on the prevailing interest rates, respectively.
The effective rates are from 4.57% to 4.90% per annum.
These
loans were guaranteed by the assets of a third party guaranty company and a shareholder of the Company. The third party
guaranty company charges 2% of total loan amount.
|
|
(2)
|
In
January, March, July and December 2017, Taizhou Fuling entered into four short-term bank borrowing agreements for approximately
$4.5 million (RMB 29.4 million) with CMB for twelve, six, six and twelve months, respectively. The effective rates were 6.09%,
2.67%, 1.99% and 6.09% per annum, respectively. The loans are guaranteed by Special Plastics and Taizhou Fuling’s general
manager and Chair of the Board. As of December 31, 2017, $1,398,970 had been repaid in full upon maturity.
|
|
(3)
|
During
fiscal year 2017, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount of $7,092,174.
The terms of these loans are five to twelve months with the interest rates ranged from 2.14% to 5.00% per annum. As of December
31, 2017, $3,024,902 of them had been repaid upon maturity.
|
|
(4)
|
During
fiscal year 2017, Taizhou Fuling entered into a series of short-term bank borrowing agreements and other financing agreements
with BOC. The terms of the loans are three to twelve months, with fixed interest rates based on London InterBank Offered Rate
(“LIBOR”) (for loans dominated in USD) or prime loan rates issued by People’s Bank of China (for loans dominated
in RMB), plus certain base points. The effective interest rates vary from 1.97% to 5.57% per annum. The loans to Taizhou Fuling
are guaranteed by the Chief Executive Officer (“CEO”). The loans to Great Plastics are guaranteed by the CEO and Chair
of the Board.
|
|
(5)
|
On March 9, 2017,
Direct Link entered into a line of credit agreement with East West Bank for $2,000,000 for one year. The annual interest rate
is equivalent to LIBOR rate plus 2.75%. Direct Link is required to make restricted deposit of $73,336 for one year with an
initial interest rate of 3.76% per annum. The line of credit is guaranteed by FGI. The agreements require Direct Link to
comply with certain financial covenants and ratios, including maintaining but not limited to minimum debt service coverage
ratio of 1.25 times and to maintain maximum total debt to equity ratio of 3.0 times. Direct Link will be measured
semi-annually at June 30th and December 31st. Direct Link was not in compliance as of December 31, 2017. On April 7, 2017,
Direct Link drew down $1,500,000 with the effective rate of 3.86% per annum. On December 1, 2017, Direct Link drew down
another $500,000 with the effective rate of 4.45% per annum. Interest expense incurred on this loan for the year ended
December 31, 2017 was $46,182. On March 14, 2018, East West Bank approved to extend the loan to June 9, 2018. Also East West
Bank waived financial covenant violations as at December 31, 2017.
|
|
(6)
|
In
November and December 2017, Taizhou Fuling entered into a series of short-term bank loan agreements with PSBC for $2,975,004 and
$1,071,593, respectively. The terms of these loans are twelve and five months, respectively. The effective rates are 2.65% and
4.15% per annum, respectively.
|
As
of December 31, 2017, land use rights in the amount of $8,442,532 and property and buildings in the amount of $15,620,048 were
pledged for all the above loans.
As
of December 31, 2016, the details of all our short-term bank loans are as follows:
(All
amounts in U.S. dollars)
|
|
|
|
As of
|
|
|
|
|
|
December 31,
2016
|
|
China Merchants Bank (“CMB”)
|
|
(1)
|
|
|
2,759,227
|
|
Industrial and Commercial Bank of China (“ICBC”)
|
|
(2)
|
|
|
3,239,848
|
|
Bank of China (“BOC”)
|
|
(3)
|
|
|
3,241,042
|
|
Zhejiang Mintai Commercial Bank (“MTB”)
|
|
(4)
|
|
|
5,759,730
|
|
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “Long-term Borrowing” below)
|
|
|
|
|
86,808
|
|
Total
|
|
|
|
$
|
15,086,655
|
|
|
(1)
|
During
fiscal year 2016, Taizhou Fuling entered into a series of seven short-term bank loan agreements with CMB for five to twelve months.
The interest rates ranged from 1.10% to 6.09% per annum. $1,440,000 of them had been repaid subsequent after December 31, 2016.
|
(2)
|
In
February 2016, Taizhou Fuling entered into a loan agreement with ICBC for $593,000 for
five months, with fixed interest rate of 3.5%. This loan had been repaid upon maturity.
In
April 2016, Taizhou Fuling entered into a loan agreement with ICBC for $647,970 for five months, bearing a variable interest
rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 161.6
base points. The effective rate was 5.92% per annum. This loan had been repaid upon maturity.
In
July 2016, Taizhou Fuling entered into two loan agreements with ICBC for $575,973 and $575,973 respectively for twelve
and five months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank
of China at the time of borrowing, plus 161.6 base points. The effective rate was 5.00% per annum. $575,973 of them had
been repaid subsequently.
In
August 2016, Taizhou Fuling entered into a loan agreement with ICBC for $647,970 for five months, bearing a variable interest
rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 113.75
base points. The effective rate was 5.44% per annum.
In
October 2016, Taizhou Fuling entered into a loan agreement with ICBC for $791,963 for twelve months, bearing a variable
interest rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing,
plus 70.25 base points. The effective rate was 5.00% per annum.
In
December 2016, Taizhou Fuling entered into two loan agreements with ICBC for $719,966 and $503,976 respectively for twelve
and twelve months, bearing a variable interest rate based on the prevailing interest rate set by the People’s Bank
of China at the time of borrowing, plus 70.25 base points. The effective rate was 5.00% per annum.
|
|
(3)
|
During
fiscal year 2016, Taizhou Fuling entered into a series of short-term bank borrowing agreements and other financing agreements
with BOC. The terms of the loans are three to twelve months, with fixed interest rates based on LIBOR (for loans dominated in
USD) or prime loan rates issued by People’s Bank of China (for loans dominated in RMB), plus certain base points. The effective
interest rates vary from 1.56% to 5.9% per annum. The loans to Taizhou Fuling are guaranteed by Great Plastics and Taizhou Fuling’s
general manager. The loans to Great Plastics are guaranteed by Taizhou Fuling’s general manager and Chair of the Board.
|
|
(4)
|
In
October and December in 2016, Taizhou Fuling entered into two loan agreements with MTB for $5,759,730 respectively for six and
six months. The effective rates were 6.41% per annum, respectively. The loan is guaranteed by Taizhou Fuling’s general manager.
|
As
of December 31, 2016, land use rights in the amount of $8,047,726 and property and buildings in the amount of $131,971 and equipment
in the amount of $0, respectively, were pledged for the above loans.
Long-term
Borrowing
Long-term
borrowings consisted of the following:
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Pennsylvania Industrial Development Authority
|
|
(1)
|
|
$
|
658,234
|
|
|
$
|
748,132
|
|
|
$
|
836,471
|
|
Agricultural Bank of China (“ABC”)
|
|
(2)
|
|
|
5,815,982
|
|
|
|
137,088
|
|
|
|
-
|
|
East West Bank (“EWB”)
|
|
(3)
|
|
|
729,141
|
|
|
|
916,667
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
7,203,357
|
|
|
$
|
1,801,887
|
|
|
$
|
836,471
|
|
|
(1)
|
On
September 28, 2016, Fuling USA entered into a ten-year Machinery and Equipment Loan Agreement with the Pennsylvania Industrial
Development Authority for $937,600, with fixed interest rate of 1.75%. This loan has been collateralized by the machinery
and equipment, worth approximately $1.72 million. As of December 31, 2018, the amount of long-term borrowing was $748,132, and
it consists of $89,898 of which is due within a year and $658,234 that is due over a year.
|
Future
obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
|
|
|
|
2019
|
|
$
|
89,898
|
|
2020
|
|
|
91,484
|
|
2021
|
|
|
93,098
|
|
2022
|
|
|
94,740
|
|
2023
|
|
|
96,411
|
|
Thereafter
|
|
|
282,501
|
|
Total
|
|
$
|
748,132
|
|
(2)
|
In
June 2018, Taizhou Fuling entered into two buyer’s credit Loan Agreements with
Agriculture Bank of China Limited for total of $2,471,792 (RMB 17 million) for 36 months.
In July 2018, Taizhou Fuling entered into three buyer’s credit Loan Agreements
with Agriculture Bank of China Limited for total of $3,344,190 (RMB 23 million) for 36
months. The loan bear variable interest rates based on the prevailing interest rate set
by the People’s Bank of China at the time of borrowing, plus 13% of the prevailing
interest rate. As of December 31, 2018, the amount of long-term borrowing was $5,815,982,
and the effective rates were 5.37% and 5.23% per annum. The line of credit’s purpose
is for inventory purchase. The line of credit is effective for the period from first
day of loan to 36 months after the first day of loan.
On
October 31, 2016, Fuling USA entered into a buyer’s credit Loan Agreement with Agricultural Bank of China Limited
for a line of credit in the amount of $5,903,723 (RMB 41 million) for 18 months. The loan bears a variable interest
rate based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 6% of
the prevailing interest rate. As of December 31, 2017, the amount of long-term borrowing was $137,088, and the
effective rate was 5.30% per annum. The line of credit’s purpose is to acquire equipment. China Export & Credit
Insurance Corporation provides insurance for the line of credit. The line of credit is effective for the period from first
day of loan to 18 months after the first day of loan. As of December 31, 2018, this loan was fully repaid in full upon
maturity.
|
(3)
|
On
March 9, 2017, Fuling USA entered into a Delayed Draw Term Loan agreement with East West Bank for $1,000,000. The amount drawn
will be turned into a 5-year term loan at LIBOR rate plus 3.00%. The loan is guaranteed by Fuling Global. Fuling USA is required
to make a restricted deposit of $73,336 for one year with an initial interest rate of 4.19% per annum. The restricted deposit
was increased to $121,639 in June 2018. The agreement requires Fuling USA to comply with certain financial covenants and ratios,
including to maintain minimum debt service coverage ratio of 1.25 times and to maintain maximum total debt to equity ratio of
3.0 times etc. Fuling USA’s compliance with these covenants will be reviewed semi-annually at December 31th and December
31th. Fuling USA was in compliance as of December 31, 2018. On April 7 and December 1, 2017, Fuling USA drew down $500,000
(April 2017 Loan) and $500,000 (December 2017 Loan), respectively. April 2017 loan will expire April 7, 2023 and December
2017 loan will expire on December 1, 2023. Both April 2017 loan and December 2017 loan require interest only payment for the first
year and require interest and principal payments for years from second year to sixth year. The effective rate was 4.11% per annum.
As of December 31, 2018, the amount of long-term borrowing was $929,141, and it consists of $200,000 of which is due within
a year and $729,141 which is due over a year.
|
Future
obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
|
|
|
|
2019
|
|
$
|
200,000
|
|
2020
|
|
|
200,000
|
|
2021
|
|
|
200,000
|
|
2022
|
|
|
200,000
|
|
2023
|
|
|
129,141
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
929,141
|
|
Bank
Notes Payable
The
Company had the following bank notes payable as of December 31, 2018:
|
|
December 31,
2018
|
|
ICBC, due May 5, 2019
|
|
$
|
286,902
|
|
ABC, due various dates from January 4, 2019 to June 27, 2019
|
|
|
2,601,151
|
|
Total
|
|
$
|
2,888,053
|
|
The
Company had the following bank notes payable as of December 31, 2017:
|
|
December 31,
2017
|
|
ICBC, due various dates from January 28, 2018 to May 27, 2018
|
|
$
|
3,052,664
|
|
ABC, due various dates from February 10, 2018 to April 30, 2018
|
|
|
1,384,016
|
|
|
|
|
|
|
Total
|
|
$
|
4,436,680
|
|
The
Company had the following bank notes payable as of December 31, 2016:
|
|
December 31,
2016
|
|
ICBC, due various dates from January 12, 2017 to June 29, 2017
|
|
$
|
1,564,479
|
|
CMBC, due April 8, 2017 and April 24, 2017
|
|
|
345,584
|
|
CITIC, due various dates from February 5, 2017 to June 27, 2017
|
|
|
172,792
|
|
Total
|
|
$
|
2,082,855
|
|
As
of December 31, 2018, 2017 and 2016, $1,439,063, $3,053,622 and $987,719 cash deposits were held by banks as a guaranty for the
notes payable, respectively.
All
loans and bank acceptance notes due as of the date of this filing have been repaid. From January to March 2019, the Company repaid
approximately $5.2 million bank loans and $1.8 million notes payable that become due. The Company also borrowed approximately
$7.4 million bank loans as well as approximately $2.0 million notes payable from various banks in China. All the loans and notes
payable are short term in nature and guaranteed by its shareholders, related parties and third parties.
Although
we currently do not have any material unused sources of liquidity, giving effect to the foregoing bank loans and other financing
activities, including the discounting of bills/notes receivable, we believe that our currently available working capital should
be adequate to sustain our operations at our current levels through at least the next twelve months. We will consider additional
borrowing based on our working capital needs and capital expenditure requirements. There is no seasonality of our borrowing activities.
Statutory
Reserves
Under
PRC regulations, all of our subsidiaries in the PRC may pay dividends only out of their accumulated profits, if any, determined
in accordance with accounting principles generally of the PRC (“PRC GAAP”). In addition, these companies are required
to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of
the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends
to the Company and can be used to make up cumulative prior year losses.
Restrictions
on net assets also include the conversion of local currency into foreign currencies, tax withholding obligations on dividend distributions,
the need to obtain State Administration of Foreign Exchange approval for loans to a non-PRC consolidated entity. We did not have
these restrictions on our net assets as of December 31, 2018, December 31, 2017 and December 31, 2016. We are also a party to
certain debt agreements that are secured with collateral on our real property, but such debt agreements do not restrict our net
assets and instead only impose restrictions on the pledged property. To the extent we wish to transfer pledged property, we are
able to do so subject to the obligation that we settle the loan obligation.
The
following table provides the amount of our statutory reserves, the amount of restricted net assets, consolidated net assets, and
the amount of restricted net assets as a percentage of consolidated net assets, as of December 31, 2018, 2017 and 2016.
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Statutory Reserves
|
|
$
|
5,532,945
|
|
|
$
|
4,617,039
|
|
|
$
|
4,017,957
|
|
Total Restricted Net Assets
|
|
$
|
5,532,945
|
|
|
$
|
4,617,039
|
|
|
$
|
4,017,957
|
|
Consolidated Net Assets
|
|
$
|
64,688,467
|
|
|
$
|
57,843,550
|
|
|
$
|
49,334,539
|
|
Restricted Net Assets as Percentage of Consolidated Net Assets
|
|
|
8.55
|
%
|
|
|
7.98
|
%
|
|
|
8.14
|
%
|
Total
restricted net assets accounted for approximately 8.55% and 7.98% of our consolidated net assets as of December 31, 2018 and 2017,
respectively. As our subsidiaries usually set aside only 10% of after-tax net profits each year to fund the statutory reserves
and are not required to fund the statutory reserves when they incur losses, we believe the potential impact of such restricted
net assets on our liquidity is limited.
Capital
Expenditures
We
had capital expenditures of approximately $4.0 million, $6.5 million and $4.0 million for the years ended December 31, 2018, 2017
and 2016, respectively for additions to and renovations of our workshops and office buildings; and purchases of equipment in connection
with our business activities.
In
2019, our capital expenditures for China are expected to be approximately $5.8 million, and will be primarily related to investments
of approximately $2.9 million in the phase II construction of manufacturing facilities and $2.9 million in machinery and equipment,
in our new factory in China.
In
2019, our capital expenditures for U.S. are expected to be approximately $0.5 million and will be primarily related to adding
machinery and miscellaneous leasehold improvement at the Allentown factory.
In
2019, our capital expenditures for Mexico are expected to be approximately $3.0 million, and will be primarily related to investment
of machinery and leasehold improvements to start up the first phase of the Mexico factory.
For
more information regarding our material commitments for capital expenditure, please see “Item 4. Information on the Company.”
We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We have used
cash generated from our subsidiaries’ operations and proceeds received from our initial public offering to fund our capital
commitments in the past and anticipate using cash generated from our subsidiaries’ operations to fund capital expenditure
commitments in the future.
Critical
Accounting Policies and Estimates
We
prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S.
GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities,
revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates
and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances.
Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations
as a result of changes in our estimates.
We
believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require
us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding
and evaluating our consolidated financial condition and results of operations.
Revenue
recognition
The
Company follows paragraph 606 of the FASB Accounting Standards Codification for revenue recognition and ASU 2014-09. On January
1, 2018, the Company adopted ASU 2014-09, which is a comprehensive new revenue recognition model that requires revenue to
be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration
expected to be received in exchange for those goods or services. The Company considers revenue realized or realizable and
earned when all the five following criteria are met: (1) Identify the Contract with a Customer, (2) Identify the Performance Obligations
in the Contract, (3) Determine the Transaction Price, (4) Allocate the Transaction Price to the Performance Obligations in the
Contract, and (5) Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation. Results for reporting periods
beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be
reported under the previous accounting standards. The Company has assessed the impact of the guidance by reviewing its existing
customer contracts and current accounting policies and practices to identify differences that will result from applying the new
requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control
and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing
and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes
to the Company’s financial statements upon adoption of ASC 606, and there have not been any significant changes to our business
processes, systems, or internal controls as a result of implementing the standard.
We
sell our products either under free on board (“FOB”) shipping point term or under FOB destination term. For sales
under FOB shipping point term, we recognize revenue when product was loaded on the ships. Product delivery is evidenced by warehouse
shipping log as well as signed shipping bills from the shipping company. For sales under FOB destination term, we recognize revenue
when the product is delivered and accepted by customer. Product delivery is evidenced by signed receipt document and title transfers
upon delivery.
Revenue
is reported net of all value added taxes. We do not routinely permit customers to return products and historically, customer returns
have been immaterial.
Allowance
for accounts receivable
We
establish an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivable.
A considerable amount of judgment is required in assessing the amount of the allowance.
We
consider the historical level of credit losses and apply percentages to aged receivable categories when we decide the allowance
for accounts receivable. Additional specific provision is made against accounts receivable to the extent which they are considered
to be doubtful. Bad debts are written off when identified and we do not accrue interest on trade receivables. Collectability conditions
are assessed on individual receivable accounts when we determine an allowance is necessary.
Income
Tax
We
account for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach
for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon
the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided
for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more
likely than not these items will either expire before the Company is able to realize their benefits, or future deductibility is
uncertain.
Our
subsidiaries in China are subject to the income tax laws of the PRC. We believe that our tax return positions are fully supported,
but tax authorities in China may challenge certain positions. Therefore, the amount ultimately paid could be materially different
from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net
income and cash flows.
Recently
Issued Accounting Pronouncements
New
Accounting Pronouncements Recently Adopted
On
April 1, 2018, we adopted ASU 2016-18, Restricted Cash – A Consensus of the FASB Emerging Issues Task Force, (“ASU
2016-18”), which amends ASC 230, Statement of Cash Flows, to clarify guidance on the classification and presentation of
restricted cash in the statement of cash flows using the full retrospective method. Adoption of this standard did not have a material
impact on our consolidated financial statements. See our unaudited condensed consolidated statements of cash flows for the reconciliation
of cash presented in the statements of cash flows to the cash presented on the balance sheet.
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) effective April 1,
2018 using the retrospective transition method. The core principle of the new accounting standard is to recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. In addition, the adoption of this new accounting standard resulted in increased
disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers. Adoption of this standard did not result in significant changes to the Company’s
accounting policies, business processes, systems or controls, or have a material impact on the Company’s financial position,
results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast.
New
Accounting Pronouncements Not Yet Adopted
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation, which simplifies the accounting for share-based
payments granted to nonemployees for goods and services. Under this ASU, most of the guidance on such payments to nonemployees
would be aligned with the requirements for share-based payments granted to employees. This ASU is effective for annual reporting
periods beginning after December 15, 2018. Early adoption of this ASU is permitted. The Company does not expect adoption of this
ASU to have a material impact on its Consolidated Financial Statements.
In
February 2016, the FASB issued ASU 2018-20, Leases (Topic 842), to increase transparency and comparability among organizations
by recognizing leases assets and lease liabilities on the balance sheet and disclosing key information about lease transactions.
This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption of this ASU is permitted.
The Company is evaluating the effect of the pronouncement on the financial statements.
C.
Research and Development, Patents and Licenses, etc.
Research
and Development
We
are committed to researching and developing better ways to make our products more environmentally-friendly and cost effective
and better ways to make our production methods more efficient. We believe scientific and technological innovations are integral
to our operations and the mainstay of our competitive advantage and differentiation strategy. The barrier to entry to produce
plastic foodservice disposables is relatively low; we believe that by devoting resources to finding new solutions to challenges
facing our customers, we are able to improve our competitiveness, even where we are not the lowest cost provider of products,
because we compensate with quality and service.
The
R&D team has 165 dedicated employees who are researchers and analysts focused on product development and design of systems
to automate our production process. Quality control is an important aspect of the teams’ work and ensuring quality at every
stage of the process has been a key driver in maintaining and developing brand value for our Company.
We
have collaborated with the Technical Institute of Physics and Chemistry of the Chinese Academy of Sciences in research regarding
foodservice disposables technology in materials, processes and systems. Current efforts focus on biodegradable product materials
including PBS and cellulose synthesis of biodegradable material. It is through these collaborations that the company has managed
to secure important breakthroughs resulting in proprietary knowledge and patents.
During
years ended December 31, 2018, 2017 and 2016, we spent $3.43 million, $2.95 million and $2.36 million, respectively, on R&D.
The increase of the amount spent on R&D was due to more R&D projects in 2018 and 2017 than 2016. R&D expenditures
in each year were for the following purposes:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in millions)
|
|
|
(in millions)
|
|
|
(in millions)
|
|
Purpose
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
0.94
|
|
|
$
|
0.70
|
|
|
$
|
0.60
|
|
Materials
|
|
|
1.98
|
|
|
|
1.97
|
|
|
|
1.36
|
|
Other
|
|
|
0.51
|
|
|
|
0.28
|
|
|
|
0.40
|
|
Total
|
|
$
|
3.43
|
|
|
$
|
2.95
|
|
|
$
|
2.36
|
|
We
expect to increase our R&D expenditures proportionate to our revenue increase in 2019.
The
following chart shows some of our recent research projects.
Project
|
|
Source
|
|
|
Year
|
|
Fully biodegradable food grade straw
|
|
R&D cooperation with Beijing Technology and Business University
|
|
|
2018
|
|
|
|
|
|
|
|
|
Light PET cups
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
PET tableware modified with surface coating
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
High transparency cup lid with high efficiency manufacturing
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
New GPPS material with HDPE/SBS/mineral modification
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
One-step production of high-filled tableware
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
Functional straw development
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
High anti-stick PP film production
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
PP Continuous physical foaming tableware production
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
Storage tray with new barrier to preserve freshness
|
|
Self-Developed
|
|
|
2018
|
|
|
|
|
|
|
|
|
Recrystallization heat-resistant full-degradable tableware
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Study of automatic packaging of tableware
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Melt grafted modified polypropylene cutlery
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Controllable bio-degradable polypropylene cutlery
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Highly transparent quick injection molding cutlery
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Natural antibacterial material composite tableware
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Food grade antistatic BOPP Straw wrapping film
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
High strength cutlery development
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Light weight PET cup
|
|
R&D cooperation with
Chinese Academy of Sciences
|
|
|
2017
|
|
|
|
|
|
|
|
|
High heat resistent crystallization CPET oven plate
|
|
Self-Developed
|
|
|
2017
|
|
|
|
|
|
|
|
|
Disposable Paper-Like Cups
|
|
R&D cooperation with
Chinese Academy of Sciences
|
|
|
2016
|
|
|
|
|
|
|
|
|
High Quality Printing Paper
|
|
R&D cooperation with
Chinese Academy of Sciences
|
|
|
2016
|
|
|
|
|
|
|
|
|
Paper Cup
|
|
Self-Developed
|
|
|
2016
|
|
|
|
|
|
|
|
|
PET Cups with/without Printing
|
|
Self-Developed
|
|
|
2016
|
|
|
|
|
|
|
|
|
PET Salad Bowl
|
|
Self-Developed
|
|
|
2016
|
|
|
|
|
|
|
|
|
Injection Deli with Printing
|
|
Self-Developed
|
|
|
2016
|
|
|
|
|
|
|
|
|
Thermoforming Deli with Printing
|
|
Self-Developed
|
|
|
2016
|
|
|
|
|
|
|
|
|
PP School Tray
|
|
Self-Developed
|
|
|
2016
|
|
Intellectual
Property
Our
Patents
We
rely on our technology patents to protect our business interests and ensure our position as a pioneering manufacturer in our industry.
We have placed a high priority on the management of our intellectual property. Some products that are material to our operating
results incorporate patented technology. Patented technology is critical to the continued success of our products. However, we
do not believe that our business, as a whole, is dependent on, or that its profitability would be materially affected by, the
revocation, termination, or expiration of, or infringement upon, any specific single patent. The following chart represents the
selected patents issued to us:
Proprietary name
|
|
Patent No.
|
|
Patent
type
|
|
Application
Date
|
|
Approval
Date
|
|
Expiration
Date
|
|
Authority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clamshell to go box
|
|
zL 2017 3 0523546.X
|
|
Design
|
|
2017.10.28
|
|
2018.03.02
|
|
2028.03.02
|
|
China State Intellectual Property Office
|
To go container
|
|
zL 2017 3 0523428.9
|
|
Design
|
|
2017.10.28
|
|
2018.05.08
|
|
2028.05.08
|
|
China State Intellectual Property Office
|
Medicine cup
|
|
zL 2017 3 0520989.3
|
|
Design
|
|
2017.10.30
|
|
2018.05.08
|
|
2028.05.08
|
|
China State Intellectual Property Office
|
Automatic cup stacking machine
|
|
zL 2017 2 1448271.9
|
|
Utility model
|
|
2017.11.02
|
|
2018.05.11
|
|
2028.05.11
|
|
China State Intellectual Property Office
|
Vacuum suction equipment for knife, fork and spoon manufacturing
|
|
zL 2017 2 1674225.0
|
|
Utility model
|
|
2017.12.05
|
|
2018.06.12
|
|
2028.06.12
|
|
China State Intellectual Property Office
|
Multifunction intelligent packaging equipment
|
|
zL 2016 1 0792046.0
|
|
Patent
|
|
2016.08.31
|
|
2018.07.06
|
|
2028.07.06
|
|
China State Intellectual Property Office
|
Cup lid hole punching machine
|
|
zL 2017 2 1807920.X
|
|
Utility model
|
|
2017.12.21
|
|
2018.07.10
|
|
2028.07.10
|
|
China State Intellectual Property Office
|
Cup lid molding machine
|
|
zL 2017 2 1810110.X
|
|
Utility model
|
|
2017.12.21
|
|
2018.07.17
|
|
2028.07.17
|
|
China State Intellectual Property Office
|
PET sheet coating machine
|
|
zL 2017 2 1807849.5
|
|
Utility model
|
|
2017.12.21
|
|
2018.07.31
|
|
2028.07.31
|
|
China State Intellectual Property Office
|
Single screw Extrusion foaming machine
|
|
zL 2017 2 1920786.4
|
|
Utility model
|
|
2017.12.29
|
|
2018.07.31
|
|
2028.07.31
|
|
China State Intellectual Property Office
|
Cup
|
|
US D724,426 S
|
|
Design
|
|
2014.07.24
|
|
2015.03.17
|
|
2029.03.17
|
|
United States Patent and
Trademark Office
|
Set of Clamshell containers
|
|
US D793,225 S
|
|
Design
|
|
2016.02.02
|
|
2017.08.01
|
|
2026.06.22
|
|
US Patent and Trademark Office
|
A type of disposable spoon
|
|
Z1 2016 2 0406977.8
|
|
Utility model
|
|
2016.05.05
|
|
2016.11.16
|
|
2026.05.05
|
|
China State Intellectual
Property Office
|
A type of disposable cutlery
|
|
Z1 2016 2 0401916.2
|
|
Utility model
|
|
2016.05.05
|
|
2016.11.16
|
|
2026.05.05
|
|
China State Intellectual
Property Office
|
A cup with
measuring cup
|
|
Z1 2016 2 0640630.X
|
|
Utility model
|
|
2016.06.22
|
|
2017.07.21
|
|
2026.06.22
|
|
China State Intellectual
Property Office
|
A type of cup combination
|
|
Z1 2016 2 0634342.3
|
|
Utility model
|
|
2016.06.22
|
|
2017.01.18
|
|
2025.5.24
|
|
China State Intellectual
Property Office
|
A type of multi-function smart packaging machine
|
|
Z1 2016 2 1002052.3
|
|
Utility model
|
|
2016.08.31
|
|
2017.03.29
|
|
2025.5.24
|
|
China State Intellectual
Property Office
|
Food grade
polypropylene
composite
material and
preparation and
uses
|
|
ZL 2010 1 0116076.2
|
|
Patent
|
|
2010.03.02
|
|
2013.06.05
|
|
2030.03.01
|
|
China State Intellectual
Property Office
|
Two section straw
packaging and
transmission
system
|
|
ZL 2007 1 0156428.5
|
|
Patent
|
|
2007.10.26
|
|
2010.12.15
|
|
2027.10.25
|
|
China State Intellectual
Property Office
|
Split-type goblets
|
|
ZL 2010 2 0684010.9
|
|
Utility model
|
|
2010.12.28
|
|
2011.08.03
|
|
2020.12.27
|
|
China State Intellectual
Property Office
|
Proprietary name
|
|
Patent No.
|
|
Patent
type
|
|
Application
Date
|
|
Approval
Date
|
|
Expiration
Date
|
|
Authority
|
Plates
|
|
ZL 2010 3 0701465.2
|
|
Design
|
|
2010.12.29
|
|
2011.08.03
|
|
2020.12.28
|
|
China State Intellectual
Property Office
|
Cup
with curled rim
|
|
ZL
2011 2 0049179.1
|
|
Utility
model
|
|
2011.02.26
|
|
2011.08.24
|
|
2021.02.25
|
|
China
State Intellectual
Property Office
|
Spork
|
|
ZL
2010 2 0685416.9
|
|
Utility
model
|
|
2010.12.28
|
|
2011.09.07
|
|
2020.12.27
|
|
China
State Intellectual
Property Office
|
Multipurpose
fork
|
|
ZL
2010 2 0685497.2
|
|
Utility
model
|
|
2010.12.28
|
|
2011.10.19
|
|
2020.12.27
|
|
China
State Intellectual
Property Office
|
Anti-counterfeit
bags
|
|
ZL
2011 2 0049491.0
|
|
Utility
model
|
|
2011.02.26
|
|
2011.10.19
|
|
2021.02.25
|
|
China
State Intellectual
Property Office
|
Combined
serviceware package
|
|
ZL
2010 2 0684440.0
|
|
Utility
model
|
|
2010.12.28
|
|
2011.11.09
|
|
2020.12.27
|
|
China
State Intellectual
Property Office
|
Hollow-handle
cutlery
|
|
ZL
2010 2 0684221.2
|
|
Utility
model
|
|
2010.12.28
|
|
2011.11.30
|
|
2020.12.27
|
|
China
State Intellectual
Property Office
|
Serviceware
kit (toughened)
|
|
ZL
2011 3 0402067.5
|
|
Design
|
|
2011.11.07
|
|
2012.05.16
|
|
2021.11.06
|
|
China
State Intellectual
Property Office
|
Ice
cream cup
|
|
ZL
2011 2 0561621.9
|
|
Utility
model
|
|
2011.12.29
|
|
2012.10.03
|
|
2021.12.28
|
|
China
State Intellectual
Property Office
|
Cover/lid
|
|
ZL
2012 3 0240031.6
|
|
Design
|
|
2012.06.11
|
|
2012.10.31
|
|
2022.06.10
|
|
China
State Intellectual
Property Office
|
Cover
remover
|
|
ZL
2012 2 0285999.5
|
|
Utility
model
|
|
2012.06.16
|
|
2013.01.09
|
|
2022.06.15
|
|
China
State Intellectual
Property Office
|
Packaging
barrel
|
|
ZL
2012 2 0288697.3
|
|
Utility
model
|
|
2012.06.16
|
|
2013.01.09
|
|
2022.06.15
|
|
China
State Intellectual
Property Office
|
Bowls
|
|
ZL
2012 3 0542829.6
|
|
Design
|
|
2012.11.09
|
|
2013.04.10
|
|
2022.11.08
|
|
China
State Intellectual
Property Office
|
Plates
(honeycomb design)
|
|
ZL
2012 3 0543240.8
|
|
Design
|
|
2012.11.09
|
|
2013.04.10
|
|
2022.11.08
|
|
China
State Intellectual
Property Office
|
Cutlery
with removable structure
|
|
ZL
2012 2 0591687.7
|
|
Utility
model
|
|
2012.11.09
|
|
2013.05.01
|
|
2022.11.08
|
|
China
State Intellectual
Property Office
|
Bowl
for noodles
|
|
ZL
2010 3 0701464.8
|
|
Design
|
|
2010.12.29
|
|
2011.06.08
|
|
2020.12.28
|
|
China
State Intellectual
Property Office
|
Combined
fork and cutlery
|
|
ZL
2010 2 0683337.4
|
|
Utility
model
|
|
2010.12.28
|
|
2011.10.19
|
|
2020.12.27
|
|
China
State Intellectual
Property Office
|
Multipurpose
clip
|
|
ZL
2011 2 0048688.2
|
|
Utility
model
|
|
2011.02.26
|
|
2011.10.19
|
|
2021.02.25
|
|
China
State Intellectual
Property Office
|
Water
dispenser bucket with handle
|
|
ZL
2011 2 0219976.X
|
|
Utility
model
|
|
2011.06.27
|
|
2012.01.25
|
|
2021.06.26
|
|
China
State Intellectual
Property Office
|
Plate
|
|
ZL
2015 3 0165070.8
|
|
Design
|
|
2015.05.27
|
|
2015.09.02
|
|
2025.05.26
|
|
China
State Intellectual
Property Office
|
Serviceware
distribution organization
|
|
ZL
2015 2 0307980. X
|
|
Utility
model
|
|
2015.05.13
|
|
2015.09.09
|
|
2025.05.12
|
|
China
State Intellectual
Property Office
|
High
luminous suction cup
|
|
ZL
2015 2 0332164.4
|
|
Utility
model
|
|
2015.05.21
|
|
2015.09.23
|
|
2025.05.20
|
|
China
State Intellectual
Property Office
|
High
transparent children plate
|
|
ZL
2015 2 0343466.1
|
|
Utility
model
|
|
2015.05.25
|
|
2015.09.23
|
|
2025.05.24
|
|
China
State Intellectual
Property Office
|
High
transparent antiskid serviceware
|
|
ZL
2015 2 0343446.4
|
|
Utility
model
|
|
2015.5.25
|
|
2015.9.23
|
|
2025.5.24
|
|
China
State Intellectual
Property Office
|
Our
Trademarks
In
addition to our patents, we also rely on trademarks and service marks to protect our intellectual property and branding. Below
is a selected list of our registered marks.
Mark
|
|
Owner
|
|
Classification
Number
(1)
|
|
|
Registration Date
|
|
Expiration Date
|
|
|
Authority
|
|
|
Taizhou Fuling
Taizhou Fuling
|
|
|
8 – #4712944
21 – #4712943
|
|
|
2008.3.28
2008.12.28
|
|
|
2028.3.27
2028.12.27
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
Taizhou Fuling
|
|
|
8 – #4712945
21 – #4712946
|
|
|
2008.3.28
2008.12.28
|
|
|
2028.3.27
2028.12.27
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
|
21
– #1032903
|
(2)
|
|
2009.11.16
|
|
|
2019.11.16
|
(3)
|
|
Intellectual
Office Property
Register
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
Taizhou Fuling
|
|
|
8 – #11235808
21 – #11235777
|
|
|
2013.12.14
2013.12.14
|
|
|
2023.12.13
2023.12.13
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
|
21 – #8441442
|
|
|
2011.7.14
|
|
|
2021.7.13
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
|
21 – #11235865
|
|
|
2013.12.14
|
|
|
2023.12.13
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Fuling
|
|
|
8 – #11236889
|
|
|
2013.12.14
|
|
|
2023.12.13
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Plastics
Great Plastics
|
|
|
8 – #9966708
21 – #9966694
|
|
|
2012.11.21
2013.3.7
|
|
|
2022.11.20
2023.3.6
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Plastics
|
|
|
8 – #9966716
|
|
|
2012.11.21
|
|
|
2022.11.20
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Plastics
Great Plastics
|
|
|
8-# 12489484
21-# 12489468
|
|
|
2014.9.28
2014.9.28
|
|
|
2024.9.27
2024.9.27
|
|
|
China State
Administration
for Industry and
Commerce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuling USA
|
|
|
8 – #4291028
|
|
|
2013.2.19
|
|
|
—
|
(4)
|
|
United States
Patent and
Trademark
Office
|
(1)
|
Classification
8 products consist of serviceware (knife, fork and spoon); knife and fork set serviceware; steel knives; chopping knives;
ice hammers; spoons; wine ladles; long handle spoons and tongs for sugar cubes. Classification 21 products consist of non-precious
metal serviceware (except knives, forks and spoons); enamel and plastic ware for everyday use (including basins, bowls, plates,
kettles and cups); ice cream sticks; lunch boxes; utensils for household uses; covers for dishes; paper or plastic cups; ice
creams spoons; non-precious serviceware and picnic baskets (including plates and dishes).
|
(2)
|
Basing
on #4712946 registration in China, we have registered the trademark at the International Bureau of the World Intellectual
Property Organization (WIPO) under the Madrid Agreement and Protocol.
|
|
|
(3)
|
We
plan to extend the registration before it expires.
|
|
|
(4)
|
The
registration is valid as long as Fuling USA timely files all post registration maintenance documents.
|
Our
Domain Names
We
have registered 6 domain names, including fulingplastics.com.cn, fulingusa.com, fulingplasticusa.com, domoplastics.com , directlinkusallc.com
and domoindustry.com, while only the first two websites are active. We also have the authorization from Ms. Guilan Jiang to use
fulingplastics.com, We do not incorporate the information on our websites into this annual report and you should not consider
any information on, or that can be accessed through, our websites as part of this annual report.
D.
Trend Information
Industry
Trends and Company Strategy
We
have noted the existence of the following trends since the beginning of 2016, all of which are likely to affect our business to
the extent they continue in the future. We are adopting strategies accordingly.
Industry
operators will need to cater to environmental concerns in order to succeed
Business
and consumer concerns over the environmental impact of plastic will gain importance as an industry trend over the next five years.
Consumers will likely be more conscious of the environmental impact of paper and plastic products and look to purchase recycled
and eco-friendly products. As a result, industry operators will need to cater to environmental concerns in order to succeed in
the industry. For instance, according to Freedonia, McDonald’s reports that its corrugated clamshells contain at least 37
percent recycled content.
Our
management believes companies that provide eco-friendly products can charge higher prices which usually offset more than the cost
increase and thus achieve higher profit margins. On average, our eco-friendly products have 10% higher gross margin compared to
our conventional products.
Innovation
and cost cutting
The
main material used to produce plastic products is plastic resin, a petroleum-based product. For this reason, fluctuations in global
crude oil prices lead to changes in the input costs for plastic manufacturers. Crude oil prices are generally volatile.
The
plastic resins we primarily use are polypropylene (“PP”), polystyrene (“PS”) which includes General Purpose
Polystyrene (“GPPS”), High Impact Polystyrene (“HIPS”), and Polyethylene Terephthalate (“PET”).
We began to use PET in 2016 to produce and fulfill orders of PET cups and cup lids. The following chart shows their percentages
of our total cost of raw materials for the years ended December 31, 2018, 2017 and 2016:
|
|
Year
Ended December 31,
|
|
Raw
Material
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
PP
|
|
|
44.93
|
%
|
|
|
44.27
|
%
|
|
|
49.05
|
%
|
GPPS
|
|
|
17.98
|
%
|
|
|
21.24
|
%
|
|
|
21.01
|
%
|
HIPS
|
|
|
2.15
|
%
|
|
|
2.46
|
%
|
|
|
2.62
|
%
|
PET
|
|
|
9.42
|
%
|
|
|
8.84
|
%
|
|
|
6.71
|
%
|
Total
|
|
|
74.48
|
%
|
|
|
76.81
|
%
|
|
|
79.39
|
%
|
The
following chart shows the monthly prices of PP, GPPS, HIPS, PET and Brent oil (one kind of crude oil) from January 2016 to March
2019:
|
|
PP ($/LB)
|
|
|
GPPS ($/LB)
|
|
|
HIPS ($/LB)
|
|
|
PET ($/LB)
|
|
|
Brent Oil ($/barrel)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
$
|
0.607
|
|
|
|
0.815
|
|
|
|
0.914
|
|
|
|
-
|
|
|
|
30.700
|
|
February
|
|
|
0.580
|
|
|
|
0.805
|
|
|
|
0.914
|
|
|
|
-
|
|
|
|
32.180
|
|
March
|
|
|
0.720
|
|
|
|
0.886
|
|
|
|
1.100
|
|
|
|
-
|
|
|
|
38.031
|
|
April
|
|
|
0.720
|
|
|
|
0.891
|
|
|
|
0.988
|
|
|
|
0.830
|
|
|
|
41.583
|
|
May
|
|
|
0.730
|
|
|
|
0.879
|
|
|
|
0.976
|
|
|
|
0.810
|
|
|
|
46.757
|
|
June
|
|
|
0.740
|
|
|
|
0.858
|
|
|
|
0.949
|
|
|
|
0.760
|
|
|
|
48.247
|
|
July
|
|
|
0.929
|
|
|
|
0.974
|
|
|
|
1.062
|
|
|
|
0.820
|
|
|
|
47.250
|
|
August
|
|
|
0.753
|
|
|
|
0.884
|
|
|
|
0.962
|
|
|
|
0.810
|
|
|
|
47.310
|
|
September
|
|
|
0.886
|
|
|
|
0.898
|
|
|
|
1.039
|
|
|
|
0.820
|
|
|
|
46.900
|
|
October
|
|
|
0.886
|
|
|
|
0.896
|
|
|
|
1.030
|
|
|
|
0.830
|
|
|
|
49.710
|
|
November
|
|
|
0.910
|
|
|
|
0.920
|
|
|
|
1.050
|
|
|
|
0.840
|
|
|
|
47.310
|
|
December
|
|
|
0.920
|
|
|
|
0.970
|
|
|
|
1.130
|
|
|
|
0.820
|
|
|
|
56.140
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
0.900
|
|
|
|
0.970
|
|
|
|
1.160
|
|
|
|
0.840
|
|
|
|
53.200
|
|
February
|
|
|
0.919
|
|
|
|
1.063
|
|
|
|
1.169
|
|
|
|
0.830
|
|
|
|
56.620
|
|
March
|
|
|
0.916
|
|
|
|
1.017
|
|
|
|
1.182
|
|
|
|
0.830
|
|
|
|
53.14
|
|
April
|
|
|
0.910
|
|
|
|
0.976
|
|
|
|
1.144
|
|
|
|
0.840
|
|
|
|
51.15
|
|
May
|
|
|
0.914
|
|
|
|
0.932
|
|
|
|
1.101
|
|
|
|
0.820
|
|
|
|
51.84
|
|
June
|
|
|
0.906
|
|
|
|
0.923
|
|
|
|
1.092
|
|
|
|
0.840
|
|
|
|
47.80
|
|
July
|
|
|
0.894
|
|
|
|
0.934
|
|
|
|
1.112
|
|
|
|
0.860
|
|
|
|
52.63
|
|
August
|
|
|
0.886
|
|
|
|
0.953
|
|
|
|
1.115
|
|
|
|
0.870
|
|
|
|
50.67
|
|
September
|
|
|
0.893
|
|
|
|
0.964
|
|
|
|
1.131
|
|
|
|
0.890
|
|
|
|
56.63
|
|
October
|
|
|
0.883
|
|
|
|
0.964
|
|
|
|
1.126
|
|
|
|
0.869
|
|
|
|
57.93
|
|
November
|
|
|
0.892
|
|
|
|
0.960
|
|
|
|
1.129
|
|
|
|
0.873
|
|
|
|
62.69
|
|
December
|
|
|
0.912
|
|
|
|
0.963
|
|
|
|
1.132
|
|
|
|
0.887
|
|
|
|
66.17
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
0.946
|
|
|
|
1.011
|
|
|
|
1.160
|
|
|
|
0.940
|
|
|
|
68.00
|
|
February
|
|
|
0.965
|
|
|
|
1.043
|
|
|
|
1.183
|
|
|
|
0.950
|
|
|
|
68.90
|
|
March
|
|
|
0.940
|
|
|
|
1.013
|
|
|
|
1.178
|
|
|
|
0.941
|
|
|
|
63.860
|
|
April
|
|
|
0.941
|
|
|
|
1.011
|
|
|
|
1.179
|
|
|
|
0.957
|
|
|
|
73.860
|
|
May
|
|
|
0.947
|
|
|
|
1.017
|
|
|
|
1.197
|
|
|
|
1.011
|
|
|
|
77.180
|
|
June
|
|
|
0.946
|
|
|
|
1.035
|
|
|
|
1.198
|
|
|
|
1.066
|
|
|
|
77.550
|
|
July
|
|
|
0.954
|
|
|
|
1.049
|
|
|
|
1.200
|
|
|
|
0.993
|
|
|
|
75.350
|
|
August
|
|
|
1.119
|
|
|
|
1.047
|
|
|
|
1.051
|
|
|
|
0.965
|
|
|
|
77.750
|
|
September
|
|
|
1.115
|
|
|
|
1.057
|
|
|
|
1.078
|
|
|
|
0.969
|
|
|
|
81.300
|
|
October
|
|
|
1.110
|
|
|
|
1.066
|
|
|
|
1.033
|
|
|
|
1.006
|
|
|
|
76.870
|
|
November
|
|
|
1.051
|
|
|
|
1.043
|
|
|
|
0.960
|
|
|
|
0.983
|
|
|
|
59.730
|
|
December
|
|
|
0.965
|
|
|
|
1.007
|
|
|
|
0.947
|
|
|
|
0.969
|
|
|
|
53.580
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
0.915
|
|
|
|
0.979
|
|
|
|
0.933
|
|
|
|
0.937
|
|
|
|
61.11
|
|
February
|
|
$
|
0.983
|
|
|
|
0.993
|
|
|
|
0.974
|
|
|
|
0.915
|
|
|
|
66.55
|
|
Increased
|
|
|
61.91
|
%
|
|
|
21.83
|
%
|
|
|
6.54
|
%
|
|
|
(2.70
|
)%
|
|
|
116.78
|
%
|
With
competition being mostly price-based, market players need to improve technology and manufacturing processes to save cost. In addition,
the environmental trend will encourage market players around the world to invest more in research and development.
We
have consistently invested in R&D and new equipment and technology to increase our cost competitiveness. The following chart
illustrates the effect:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
Increase (decrease) from 2016 to 2018
|
|
Average Worker Annual Salary
|
|
$
|
7,719
|
|
|
$
|
8,628
|
|
|
$
|
9,570
|
|
|
|
24.0
|
%
|
R&D Expense
|
|
$
|
2,355,539
|
|
|
$
|
2,953,477
|
|
|
$
|
3,432,188
|
|
|
|
45.7
|
%
|
Productivity Per Employee
|
|
$
|
145,058
|
|
|
$
|
121,572
|
|
|
$
|
111,920
|
|
|
|
-2.2
|
%
|
Proximity
to key markets is a major success factor
Although
many degradable products are imported from Asia, due to rising manufacturing costs in China, some importers of degradable foodservice
disposables are in the midst of establishing U.S. production operations. For example, Trellis Earth Products, an Oregon-based
manufacturer of sustainable food service products, is shifting its manufacturing of its bioplastic-based disposables from China
to a facility in Rochester, New York. The trend is based on the economic logic of producing or sourcing near the consumer.
The
nature of some of our products (straws, cups and plates, specifically) necessitates operations to be fairly localized, as shipping
costs tends to be significant for these products. It makes economic sense to manufacture those products at a location close to
markets. In addition to reduced transportation costs and delivery time, this is also helpful for customer satisfaction since it
allows manufacturers to respond to customer needs more quickly.
In
2014, we commenced construction of a manufacturing facility in Allentown, Pennsylvania, which provides us a platform to manufacture
drinking straws in the United States. The total investment for the project will be roughly $10.1 million. The factory in Allentown
became operational in June 2015.
Business
Development Trends
Our
prices fluctuate based on changes in our material costs. We and our long-term customers closely follow changes in such prices
and adjust our product prices accordingly. Oil prices remained high in the first half of 2018 putting pressure on our profit margin
as the market remained competitive and it was difficult to implement price increases. As oil prices declined in the second half
of 2018, we regained some of the profits with lower raw material costs. However, the higher tariffs stemmed from the trade conflict
between China and U.S. created another problem for us and we had to make adjustments in sourcing raw materials for the production
in our Allentown factory.
E.
Off-Balance Sheet Arrangements
Off-balance
Sheet Commitments and Arrangements
We
have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.
In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’
equity, or that are not reflected in our consolidated financial statements.
F.
Tabular Disclosure of Contractual Obligations
Below
is a table setting forth all of our contractual obligations as of December 31, 2018, which consists of our short-term loan agreements,
loans from third parties and due to related parties:
|
|
Payment Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 – 3
years
|
|
|
3 – 5
years
|
|
|
More than
5 years
|
|
Short-Term Debt Obligations
|
|
$
|
19,890,641
|
|
|
$
|
19,890,641
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Long-Term Debt Obligations
|
|
|
7,203,357
|
|
|
|
0
|
|
|
|
6,400,563
|
|
|
|
520,293
|
|
|
|
282,501
|
|
Bank Acceptance Notes Payable
|
|
|
2,888,053
|
|
|
|
2,888,053
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Capital Lease Obligations
|
|
|
5,483,426
|
|
|
|
2,847,859
|
|
|
|
2,635,567
|
|
|
|
0
|
|
|
|
0
|
|
Operating Lease Obligations
|
|
|
4,184,632
|
|
|
|
866,971
|
|
|
|
1,777,282
|
|
|
|
1,343,448
|
|
|
|
196,931
|
|
Letter of Credit
|
|
|
5,147,960
|
|
|
|
5,147,960
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Short-Term Debt Interest Obligations
|
|
|
1,185,168
|
|
|
|
1,185,168
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Long-Term Debt Interest Obligations
|
|
|
973,208
|
|
|
|
313,673
|
|
|
|
573,865
|
|
|
|
78,403
|
|
|
|
7,267
|
|
Purchase Obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Loans from Third Parties
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
46,956,445
|
|
|
$
|
33,140,325
|
|
|
$
|
11,387,277
|
|
|
$
|
1,942,144
|
|
|
$
|
486,699
|
|
G.
Safe Harbor
See
“SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.”
Item
6.
|
Directors,
Senior Management and Employees
|
A.
Directors and Senior Management
The following table provides information
regarding our senior management ,directors and a key U.S. executive as of April 5, 2019:
Name
|
|
Age
|
|
|
Position(s)
|
Xinfu
Hu
|
|
|
58
|
|
|
Chief
Executive Officer
|
Guilan
Jiang
|
|
|
55
|
|
|
Chair
of Board of Directors and Chief Operating Officer
|
Gilbert
Lee
|
|
|
61
|
|
|
Chief
Financial Officer
|
Sujuan
Zhu
|
|
|
47
|
|
|
Director
|
Jian
Cao
|
|
|
68
|
|
|
Director
(Independent)
|
Hong
(Simon) He
|
|
|
50
|
|
|
Director
(Independent)
|
Fuyou
Cai
|
|
|
53
|
|
|
Director
(Independent)
|
John
C. Kunes
|
|
|
69
|
|
|
Executive
Vice President of Fuling USA
|
The
business address of all such senior management and directors is Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province,
People’s Republic of China 317511.
Directors
Guilan
Jiang
. Ms. Jiang has served as the Chief Operating Officer and Chair of the Company since September 2015. Ms. Jiang co-founded
Taizhou Fuling in October of 1992 with her husband, Mr. Xinfu Hu, our CEO, and serves as the legal representative and the Chair.
Ms. Jiang co-founded Great Plastics in March 2010 with Mr. Xinfu Hu and Ms. Sujuan Zhu, and serves as the legal representative,
the general manager and a director. Ms. Jiang previously owned 95% of Zhejiang Special Plastics Technology Co., Ltd. (“Special
Plastics”) from September 2006 through 2015 and acts as a supervisor. Ms. Jiang is the general manager and a shareholder
of Wenling Wantong Investment Co., Ltd. Ms. Jiang has been certified by Zhejiang Province as a senior economist in 2012. This
qualification certifies her qualification and experience in business management, and understanding of the global economic marketplace
in which we operate and shows that she has passed certain qualification tests in business field. Currently Ms. Jiang is Deputy
Chair of the China Plastics Processing Industry Association, Deputy Chair of the Zhejiang Female Entrepreneur Association, and
Chair of the Wenling Plastics Association. Ms. Jiang has acted as a representative of the local People’s Congress several
times, most recently, in March 2017. Ms. Jiang has received an award as an Outstanding Female in China, as a Top 10 Outstanding
Female in Zhejiang, and as an Excellent Entrepreneur in Taizhou and Wenling. Ms. Jiang received her associate degree in accounting
from China University of Geosciences in 2006. We have chosen Ms. Jiang to serve as the Chair of our board of directors because
of her more than twenty years of experience in our industry, and leadership at the national level.
Sujuan
Zhu
. Ms. Zhu has been a member of our board of directors since January 19, 2015. She co-founded Taizhou Fuling in October
1992, is a director and has worked in its financial department. Ms. Zhu also co-founded Great Plastics in March 2010. Ms. Zhu
is also a director and the general manager of Wenling Hongkun Investment Co., Ltd. We have chosen Ms. Zhu to serve on our board
of directors because of her more than twenty years of experience advising and assisting our company on finance and management
as it has grown.
Jian
Cao
. Mr. Cao has been an independent member of our board of directors since July 2015. Mr. Cao has been the Executive
Vice President at the China Plastics Processing Industry Association since May 1995 and legal representative since May 2011. In
this capacity, Mr. Cao manages the daily operations of the association. Mr. Cao has helped the Association participate in the
development of the national standards applicable to the plastics industry. Prior to working with the China Plastics Processing
Industry Association, Mr. Cao served a plastic industry association in Liaoning Province, including as general manager, since
1978. Since August 2013, Mr. Cao has also served as a director at Xinjiang Tianye Water Saving Irrigation System Company Limited,
a public company in China. Mr. Cao is also a director at Jiangsu Cenmen Equipment Co., Ltd., another public company in China.
Mr. Cao has also been a director at the China Light Industry Federation since May 2012. Since May 2013, Mr. Cao has been chief
of the national standardization technical committee for the plastics industry. Mr. Cao earned his bachelor degree in October 1978
from Dalian University of Technology. We believe Mr. Cao’s qualifications to serve on our board of directors include his
knowledge of our industry, with almost 40 years’ experience in the plastics industry.
Hong
(Simon) He
. Mr. He has been an independent member of our board of directors since July 2015. Since August 2014, Mr. He
has been the finance director of SciClone Pharmaceuticals, Inc., which is a Nasdaq-listed company with main operations in China.
He manages corporate financial analysis, SEC reporting and SOX compliance. Mr. He was Vice President of Finance and the controller
of Augmedix, Inc. from January 2014 to June 2014, where he developed financial accounting and reporting process in compliance
with U.S. GAAP. From October 2011 to December 2013, Mr. He was the Vice President of Finance at Baidu Leho.com, which is backed
by Baidu, a Nasdaq-listed company. He established financial accounting infrastructure and ensured the financial statements were
prepared in line with the U.S. GAAP. From March 2010 to October 2011, Mr. He was the CFO of Sunity Online Entertainment Ltd.,
a pre-IPO company. He coordinated the IPO application for Nasdaq listing and ensured the U.S. GAAP compliance for its financial
statements. Mr. He is a U.S. Certified Management Accountant and a China Certified Public Accountant. Mr. He earned his Bachelor
of Science degree in accounting from Beijing University of Technology in July 1992 and his MBA degree from University of Chicago
Booth School of Business in December 2006. We have selected Mr. He to serve on our board of directors and as the Chair of our
Audit Committee because of his rich accounting and finance experience.
Fuyou
Cai.
Mr. Cai has been an independent member of our board of directors since January 2019. Mr. Cai is a partner of Zhejiang
Mingquan Law Firm. He has been working at Zhejiang Mingquan Law Firm since May 1995 and received his lawyer’s license in
2010. Mr. Cai has been providing legal services to various companies and governmental agencies. Mr. Cai is also a part-time professor
of China University of Political Science and Law and a guest professor of Zhejiang Agricultural University. Mr. Cai earned his
Bachelor of Laws degree in 2002 from Zhejiang University and a Master of Laws from Southwest University of Political Science &
Law in 2008. We have selected Mr. Cai to serve on our board of directors because of his rich compliance experience.
Executive
Officers
Xinfu
Hu.
Mr. Hu has served as the Chief Executive Officer of the Company since September 2015 . Mr. Hu co-founded Taizhou Fuling
in October of 1992 with his wife, Ms. Guilan Jiang, and serves as the general manager. Mr. Hu co-founded Great Plastics in March
2010 with his wife, Ms. Guilan Jiang, and Ms. Sujuan Zhu and has served as a supervisor. Mr. Hu is also the legal representative,
the general manager and a director of Wenling Yuanheng Real Estate Development Co., Ltd. Mr. Hu is a shareholder of Sanmen Decoration
City Market Development Co., Ltd and Hangzhou YaJiu Investment Co., Ltd. Mr. Hu has been certified by Zhejiang Province as a senior
economist in 2013. This qualification certifies his qualification and experience in business management, and understanding of
the global economic marketplace in which we operate and shows that he has passed certain qualification tests in business field.
Mr. Hu is also an engineer. Currently Mr. Hu is Deputy Chair of the China Chamber of Commerce for Import and Export of Light Industrial
Products and Arts and Crafts, and a member of Committee of the People’s Political Consultative Conference of Sanmen County.
Mr. Hu received his associate degree in business management from Southwest University of Science and Technology in 2006. Our board
of directors has chosen Mr. Hu to serve as Chief Executive Officer because of his more than twenty years of experience in our
industry.
Gilbert
Lee.
Mr. Lee has been our Chief Financial Officer since August 2015. Mr. Lee was the Vice President of Operations of Fuling
USA from May 2015 to August 2015. Prior to joining our company, from October 2013 through May 2015, Mr. Lee was Vice President
of Business Development and prior to that, from August 2011 to October 2013, the U.S. based Chief Financial Officer at Tanke Biosciences
Corporation, a Chinese manufacturer listed on OTCQB, where he was responsible for SEC reporting, investor relations, capital-raising,
GAAP conversion, annual audits, and corporate finance. From 2010 through 2011, Mr. Lee was the Finance Executive in Planning &
Analysis for Dimensional Merchandising Inc., at which he developed strategies to turn around sales and profit, and oversaw accounting
and payroll functions. Mr. Lee also held various executive positions in finance, marketing, and business analysis at a Paris CAC
40 company and a NYSE listed company. Mr. Lee is a CPA and a CMA. Mr. Lee earned his MBA from University of Texas at Austin in
1995, his MPA (Master of Professional Accounting) from University of Texas at Arlington in 1987 and his BBA (Bachelor of Business
Administration) in Marketing from University of Texas at Arlington in 1982.
Key
U.S. Executive
John
C. Kunes.
Mr. Kunes has served as Executive Vice President at Fuling USA/Old Fuling USA since January 2013 and was the
Chief Marketing Officer at Old Fuling USA from July 2009, responsible for developing customer relationships, negotiating distribution
logistics, and marketing our products in the United States. Mr. Kunes has been an independent contractor for Fuling USA/Old Fuling
USA since January 2013 through JCK Enterprises. Prior to joining our company, Mr. Kunes was Director of Operations for Jet Plastica
Industries, a plastic foodservice disposables company, from 1998 through 2008. At Jet Plastica he managed more than 600 employees,
and implemented projects to enhance efficiency such as automating production lines and matching cutlery production to orders.
Mr. Kunes worked as the Director of Finance for Tenneco Packaging from 1995 through 1998 and in a variety of operations and finance
roles. He was plant manager and business unit controller for Mobil Chemical Company from 1988 through 1995. Mr. Kunes earned his
B.S. and MBA from the Rochester Institute of Technology.
B.
Compensation
Compensation
of Directors and Executive Officers
In
2018, we paid an aggregate of approximately US $370,000 in cash as salaries and fees to our senior executives, officers
and directors named in this annual report, and granted an aggregate of 15,705 Ordinary Shares to our CFO. We do not separately
set aside any amounts for pensions, retirement or other benefits for our executive officers, other than pursuant to relevant statutory
requirements.
Share
Incentive Plan
For
information regarding the share incentive plan, see “Item 6. Directors, Senior Management and Employees — Share and
Share Options.”
C.
Board Practices
Terms
of Directors and Executive Officers
All
directors hold office until the next annual meeting of shareholders at which they are re-elected and until their successors have
been duly elected and qualified. Officers are elected by and serve at the discretion of the board of directors. See “Item
6.A Directors and Senior Management” as to current directors and officers. In addition, the service agreements between us
and the directors do not provide benefits upon termination of their services.
Election
of Officers
Our
executive officers are elected by, and serve at the discretion of, our board of directors. Our Chief Operating Officer and Chair
of our board of directors, Guilan Jiang is married to the Chief Executive Officer, Xinfu Hu. Sujuan Zhu, one of our board directors,
is Guilan Jiang’s sister-in-law. Other than these relationships, there are no familial relationships among any members of
the executive officers.
Board
of Directors and Board Committees
Our
board of directors currently consists of five (5) directors. A majority of our board of directors (namely, Messrs. Cao, He and
Cunningham) are independent, as such term is defined by the Nasdaq Capital Market.
A
director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the
interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any
vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure
and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director
may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in
which he is so interested and may vote on such motion.
We
do not have a lead independent director, and we do not anticipate having a lead independent director because we will encourage
our independent directors to freely voice their opinions on a relatively small company board. We believe this leadership structure
is appropriate because we are a relatively small. Our board of directors plays a key role in our risk oversight. The board of
directors makes all relevant Company decisions. As a smaller company with a small board of directors, we believe it is appropriate
to have the involvement and input of all of our directors in risk oversight matters.
Board
Committees
We
have established three standing committees under the board: the audit committee, the compensation committee and the nominating
committee. Each committee has three members, and each member is independent, as such term is defined by The Nasdaq Capital Market.
The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of
the financial statements of our company, including the appointment, compensation and oversight of the work of our independent
auditors. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation
policies for our officers and all forms of compensation, and also administers and has authority to make grants under our incentive
compensation plans and equity-based plans (but our board will retain the authority to interpret those plans). The nominating committee
of the board of directors is responsible for the assessment of the performance of the board, considering and making recommendations
to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers
diversity of opinion and experience when nominating directors.
The
members of the audit committee, the compensation committee and the nominating committee as of December 31, 2018 are set forth
below. All such members qualify as independent under the rules of The Nasdaq Capital Market.
Director
|
|
Audit
Committee
|
|
|
Compensation
Committee
|
|
|
Nominating
Committee
|
|
Jian Cao
|
|
|
(1
|
)
|
|
|
(1
|
)(2)
|
|
|
(1
|
)
|
Hong (Simon) He
|
|
|
(1
|
)(2)(3)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Donald T. Cunningham, Jr.
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)(2)
|
(1)
|
Committee
member
|
|
|
(2)
|
Committee
chair
|
|
|
(3)
|
Audit
committee financial expert
|
Duties
of Directors
Under
Cayman Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. The directors
of a company occupy a fiduciary relationship to the Company, which means that they owe heightened duties of good faith and responsibility.
Our directors have a duty to exercise the care, skill and diligence that would be exercised by a reasonably diligent person having
the general knowledge, skill and experience reasonably to be expected of a person acting as a director and must exercise the knowledge,
skill and experience which they actually possess. See “Description of Share Capital — Differences in Corporate Law”
for additional information on our directors’ fiduciary duties under Cayman Islands law. In fulfilling their duty of care
to us, our directors must ensure compliance with our First Amended and Restated Memorandum and Articles of Association. We have
the right to seek damages if a duty owed by our directors is breached.
Interested
Transactions
A
director may vote, attend a board meeting or, presuming that the director is an officer and that it has been approved, sign a
document on our behalf with respect to any contract or transaction in which he or she is interested. We require directors to promptly
disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we
have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a
meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer
or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will
be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular
transaction.
Remuneration
and Borrowing
The
directors may receive such remuneration as our board of directors may determine or change from time to time. The compensation
committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors
may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part
thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability
or obligation of the company or of any third party.
Qualification
A
majority of our board of directors is required to be independent. There are no membership qualifications for directors. Further,
there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements
or understandings pursuant to which our directors are selected or nominated.
Director
Compensation
All
directors hold office until the next annual meeting of shareholders at which they are re-elected and until their successors have
been duly elected and qualified. Our Chief Operating Officer and Chair of our Board of Directors, Guilan Jiang is married to the
CEO, Xinfu Hu. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive
any compensation for their services. Non-employee directors will be entitled to receive such remuneration as our board of directors
may determine or change from time to time for serving as directors and may receive incentive option grants from our company. In
addition, each non-employee director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably
incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or
shareholder meetings or otherwise in connection with the discharge of his or her duties as a director.
Limitation
of Director and Officer Liability
Under
Cayman Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in
good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Cayman Islands law does not limit the extent to which a company’s First Amended and
Restated Memorandum and Articles of Association may provide for indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime.
Under
our First Amended and Restated Memorandum and Articles of Association, we may indemnify our directors, officers and liquidators
against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred
in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be
made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons
must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings,
they must have had no reasonable cause to believe their conduct was unlawful. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors
under United States federal securities laws.
The
decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests
and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud
sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any
judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did
not act honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe
that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred
to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines
and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.
We
may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the
directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the
power to indemnify the directors or officers against the liability as provided in our First Amended and Restated Memorandum and
Articles of Association.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling
our company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations
or similar misdemeanors, nor has been a party to any judicial or administrative proceeding during the past five years that resulted
in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal
or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed
without sanction or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors
and officers have not been involved in any transactions with us or any of our affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
D.
Employees
As
of December 31, 2018, we employed a total of 1,476 full-time and no part time employees in the following functions:
|
|
Number of Employees
|
|
Department
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Senior Management
|
|
|
23
|
|
|
|
23
|
|
|
|
23
|
|
Human Resource & Administration
|
|
|
61
|
|
|
|
71
|
|
|
|
54
|
|
Finance
|
|
|
17
|
|
|
|
18
|
|
|
|
19
|
|
Research & Development
|
|
|
230
|
|
|
|
230
|
|
|
|
180
|
|
Material Management
|
|
|
18
|
|
|
|
15
|
|
|
|
15
|
|
Quality Control
|
|
|
90
|
|
|
|
90
|
|
|
|
80
|
|
Production
|
|
|
1017
|
|
|
|
1396
|
|
|
|
970
|
|
Sales & Marketing
|
|
|
20
|
|
|
|
19
|
|
|
|
18
|
|
Total
|
|
|
1,476
|
|
|
|
1,862
|
|
|
|
1359
|
|
Production
employees decreased in 2018 because we used more machines to replace workers and also decreased the number of production managers
to control our managing costs.
Of
our total employees on December 31, 2018, 1,423 were employed in China and 62 were employed in the United States (not including
John Kunes, our U.S. - based Executive Vice President who is an independent contractor).
Our
employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced
any work stoppages.
We
are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In
addition, we are required by PRC law to cover employees in China with various types of social insurance. In 2018, we contributed
approximately $998,140 and $1,788,473 to the employee benefit plans and social insurance, respectively. In 2017, we
contributed approximately $802,443 and $1,652,495 to the employee benefit plans and social insurance, respectively. In 2016,
we contributed approximately $657,074 and $1,183,373 to the employee benefit plans and social insurance, respectively. The effect
on our liquidity by the payments for these contributions is immaterial. We believe that we are in material compliance with the
relevant PRC employment laws.
Employment
Agreements
In
accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became
effective in January 2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees
of the Chinese entity in order to establish an employment relationship. However, as Mr. Hu and Ms. Jiang are retained by FGI,
a Cayman Islands entity, and as Mr. Lee and Mr. Kunes are retained by a U.S. entity, they are not governed by this requirement.
Nevertheless, Mr. Kunes has an independent contractor agreement through JCK Enterprises and each of Mr. Hu, Ms. Jiang and Mr.
Lee has an employment agreement.
In
China, all employers must compensate their employees equal to at least the local minimum wage standards. All employers are required
to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with
appropriate workplace safety training. In addition, employers in China are obliged to pay contributions to the social insurance
plan and the housing fund plan for employees. Accordingly, all of our employees, including management, have executed their employment
agreements. Our employment agreements with our executives provide the amount of each executive officer’s salary and establish
their eligibility to receive a bonus. We believe our labor relationships are good.
Our
employment agreements with our executive officers generally provide for a salary to be paid monthly. The agreements also provide
that executive officers are to work full time for our company and are entitled to all legal holidays as well as other paid leave
in accordance with PRC laws and regulations and our internal work policies. The employment agreements also provide that we will
pay for all mandatory social insurance programs for our executive officers in accordance with PRC regulations. In addition, our
employment agreements with our executive officers prevent them from rendering services for our competitors for so long as they
are employed.
Other
than the salary, bonuses, equity grants and necessary social benefits required by the government, which are defined in the employment
agreements, we currently do not provide other benefits to the officers. Our executive officers are not entitled to severance payments
upon the termination of their employment agreement or following a change in control. We are not aware of any arrangement that
may at a subsequent date, result in a change of control of our company.
We
have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or
severance or change of control benefits to our named executive officers.
Under
Chinese law, we may terminate an employment agreement without penalty by providing the employee thirty days’ prior written
notice or one month’s wages in lieu of notice if the employee is incompetent or remains incompetent after training or adjustment
of the employee’s position in other limited cases. If we wish to terminate an employment agreement in the absence of cause,
then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however,
permitted to terminate an employee for cause without penalty to our company, where the employee has committed a crime or the employee’s
actions or inactions have resulted in a material adverse effect to us.
Guilan
Jiang
We
entered into an employment agreement with our Chief Operating Officer and Chair, Ms. Guilan Jiang, effective September 12, 2015.
Under the terms of Ms. Jiang’s employment, she is entitled to base compensation of $100,000 per year.
Ms.
Jiang’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon
presentation of 30 days’ prior notice in the event she is unable to perform assigned tasks or the parties are unable to
agree to changes to her employment agreement.
Xinfu
Hu
We
entered into an employment agreement with our Chief Executive Officer, Mr. Xinfu Hu, effective September 12, 2015. Under the terms
of Mr. Hu’s employment, he is entitled to base compensation of $100,000 per year.
Mr.
Hu’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon presentation
of 30 days’ prior notice in the event he is unable to perform assigned tasks or the parties are unable to agree to changes
to his employment agreement.
Gilbert
Lee
We
entered into an employment agreement with our Chief Financial Officer, Mr. Lee, effective August 17, 2015. Under the terms of
Mr. Lee’s employment, he is entitled to the following:
|
●
|
Base
compensation of $120,000 per year.
|
|
●
|
An
incentive grant equal to one-half percent (0.5%) of the final outstanding shares after FGI’s initial public offering;
twenty percent (20%) of such shares will be granted upon the conclusion of the initial public offering of FGI and each anniversary
of the conclusion of the initial public offering of FGI, until all such shares have been issued, provided Mr. Lee remains
employed with us at such time.
|
Mr.
Lee’s employment has no expiration date but may be terminated immediately for cause or at any time by either party upon
presentation of 30 days’ prior notice in the event he is unable to perform assigned tasks or the parties are unable to agree
to changes to his employment agreement.
E.
Share Ownership
For
information regarding the share ownership of our directors and senior management, see “Item 7. Major Shareholders and Related
Party Transactions — A. Major Shareholders.”
Share
and Share Options
Incentive
Securities Pool
We
have established a pool for shares and share options for our employees. As of the date of this report, this pool contains shares
and options to purchase 1,570,509 of our Ordinary Shares, equal to 10% of the number of Ordinary Shares outstanding at the conclusion
of our initial public offering. Subject to approval by the Compensation Committee of our board of directors, we may grant options
in any percentage determined for a particular grant. We may grant the award of options to existing employees, officers and consultants.
We may also grant the award of restricted stock as a hiring incentive to employees, officers and directors and to non-employee
directors on an ongoing basis.
Any
options granted will vest at a rate of 20% per year for five years and have a per share exercise price equal to the fair market
value of one of our common shares on the date of grant. We expect to grant shares and/or options under this pool to certain employees.
We have not yet determined the recipients of any such grants.
Item
7.
|
Major
Shareholders and Related Party Transactions
|
A.
Major Shareholders
The following table sets forth information
with respect to beneficial ownership of our Ordinary Shares as of April 5, 2019 by:
|
●
|
Each
person who is known by us to beneficially own 5% or more of our outstanding Ordinary Shares;
|
|
|
|
|
●
|
Each
of our directors and named executive officers; and
|
|
|
|
|
●
|
All
directors and named executive officers as a group.
|
The number and percentage of Ordinary Shares
beneficially owned before the offering are based on 15,795,910 Ordinary Shares outstanding as of April 5, 2019. Information with
respect to beneficial ownership has been furnished by each director, officer or beneficial owner of 5% or more of our Ordinary
Shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have
voting or investment power with respect to securities. In computing the number of Ordinary Shares beneficially owned by a person
listed below and the percentage ownership of such person, Ordinary Shares underlying options, warrants or convertible securities
held by each such person that are exercisable or convertible within 60 days of April 5, 2019 are deemed outstanding, but are not
deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes
to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power
for all Ordinary Shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each
principal shareholder is in the care of our Company at Southeast Industrial Zone, Songmen Town, Wenling, Zhejiang Province, People’s
Republic of China 317511.
|
|
Ordinary
Shares beneficially
owned
(1)
|
|
|
|
Number
|
|
|
Percent
|
|
Directors and Senior Management:
|
|
|
|
|
|
|
Guilan
Jiang
(2)
|
|
|
5,541,668
|
|
|
|
35.1
|
%
|
Xinfu Hu
(2)
|
|
|
0
|
|
|
|
-
|
|
Gilbert Lee
|
|
|
62,820
|
|
|
|
*
|
|
Jian Cao
|
|
|
12,000
|
|
|
|
*
|
|
Hong (Simon) He
|
|
|
12,000
|
|
|
|
*
|
|
Fuyou Cai
|
|
|
0
|
|
|
|
-
|
|
Sujuan Zhu
(3)
|
|
|
2,216,667
|
|
|
|
14.0
|
%
|
John C. Kunes
|
|
|
0
|
|
|
|
-
|
|
All directors and executive officers as a group (eight (8) persons)
|
|
|
7,845,155
|
|
|
|
49.7
|
%
|
5% or greater Beneficial Owners:
|
|
|
|
|
|
|
|
|
Qian Hu
(2)
|
|
|
1,154,104
|
|
|
|
7.3
|
%
|
Xinzhong Wang
|
|
|
1,108,333
|
|
|
|
7.0
|
%
|
Jinxue Jiang
(3)
|
|
|
1,108,333
|
|
|
|
7.0
|
%
|
*
Less than 1%
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting or
investment power with respect to the Ordinary Shares.
|
(2)
|
Ms.
Jiang and Mr. Xinfu Hu are married, and Mr. Qian Hu is their adult son. Ms. Jiang holds her shares through Silver Trillion
Investments Limited, a British Virgin Islands company which she owns and controls and may be deemed to hold beneficial ownership
of such shares. Mr. Qian Hu holds 45,771 shares by himself and 1,108,333 shares through Zheng Hui Investments Limited, a British
Virgin Islands company which he owns and controls and may be deemed to hold beneficial ownership of such shares.
|
Mr.
Xinfu Hu does not, directly or indirectly, exercise or share voting or investment power of any shares held by Silver Trillion
Investments Limited or Zheng Hui Investments Limited and disclaims beneficial ownership of such shares. Mr. Qian Hu does not,
directly or indirectly, exercise or share voting or investment power of any shares held by Silver Trillion Investments Limited
and disclaims beneficial ownership of such shares. Ms. Jiang does not, directly or indirectly, exercise or share voting or investment
power of any shares held by Zheng Hui Investments Limited and disclaims beneficial ownership of such shares.
(3)
|
Ms.
Zhu is the mother of Mr. Jinxue Jiang. Ms. Zhu holds her shares through Celestial Sun Holding Limited, a British Virgin Islands
company and may be deemed to share beneficial ownership of such shares. Mr. Jiang holds 1,108,333 shares through Tengyu International
Limited, a British Virgin Islands company and may be deemed to hold beneficial ownership of such shares.
|
Ms.
Zhu does not, directly or indirectly, exercise or share voting or investment power of any shares held by Tengyu International
Limited and disclaims beneficial ownership of such shares. Mr. Jiang does not, directly or indirectly, exercise or share voting
or investment power of any shares held by Celestial Sun Holding Limited and disclaims beneficial ownership of such shares.
B.
Related party transactions
In
addition to the executive officer and director arrangements discussed in “Item 6. Directors, Senior Management And Employees,”
below we describe transactions since January 1, 2012, to which we have been a participant, in which the amount involved in the
transactions is material to us or the related party.
Special
Plastics; Ms. Guilan Jiang and Mr. Qian Hu
Since
the beginning of fiscal 2012, we have had transactions with Special Plastics, a PRC company that was previously 95% owned by our
Chief Operating Officer and Chair, Ms. Guilan Jiang, and 5% owned by Mr. Qian Hu, a shareholder of FGI and Ms. Jiang’s and
Mr. Xinfu Hu’s son. Mr. Qian Hu currently owns 100% of Special Plastics. Special Plastics has established an advanced testing
center that has been certified by China’s National Accreditation Service for Conformity Assessment. Special Plastics mainly
provides some pre-delivery product testing for our products in addition to the testing we conduct ourselves. Special Plastics
currently provides these services without additional charge to us. We estimate that we would pay approximately $10,000 per year
for these services if Special Plastics did not provide such services, and we do not anticipate that we would encounter any difficulty
obtaining such services from a third party. None of Ms. Jiang, Mr. Qian Hu or Special Plastics receives any material benefit from
third parties for providing these testing services.
Since
our products are exported, it is important to ensure that our products conform to standards in the different countries where they
are sold. Special Plastics’ facility is equipped with industry leading testing equipment and experts. The facility includes
low-high temperature test chambers, automatic density apparatus, automatic colorimeter, electronic balance, melt flow rate tester,
Charpy impact strength testing machine and ATP fluorescence detector.
Rental
Payments to Special Plastics
During
the years ended December 31, 2018, 2017 and 2016, we paid Special Plastics $55,715, $54,550 and $55,484, respectively, for rental
of a factory building at 8 Shengpan Road, Guanweitong Village, Wenqiao County.
Future
Related Party Transactions
Our
Corporate Governance Committee of our board of directors (which consists solely of independent directors) have approved all related
party transactions. All material related party transactions are made or entered into on terms that are no less favorable to use
than can be obtained from unaffiliated third parties.
C.
Interests of experts and counsel
Not
applicable for annual reports on Form 20-F.
Item
8.
|
Financial
Information
|
A.
Consolidated Statements and Other Financial Information
Please
refer to Item 18.
Legal
and Administrative Proceedings
We
are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material
legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings
arising in the ordinary course of our business.
Dividend
Policy
We
anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore,
we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will
be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital
requirements, financial conditions and future prospects and other factors the board of directors may deem relevant. Other than
dividends of (i) $9,000 declared by Taizhou Fuling in 2004 and reinvested in Taizhou Fuling as additional paid in capital, (ii)
$900,000 declared by Taizhou Fuling in 2007 and reinvested in Taizhou Fuling as additional paid in capital and (iii) $10,274,848
declared by Taizhou Fuling in 2014, of which $7,530,000 was reinvested in Taizhou Fuling as additional paid in capital, we have
never declared or paid any cash dividends on our Ordinary Shares. Those dividends were paid in RMB in China. (Most of the portion
of the 2014 dividend that was not reinvested consisted of taxes associated with restructuring the Company.)
Under
Cayman Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total
assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent
before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary
course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities,
other than deferred taxes as shown on our books of account, and our capital.
If
we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt
of funds from our BVI subsidiary, Total Faith. Current PRC regulations permit our indirect PRC subsidiaries to pay dividends to
Total Faith only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations.
In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any,
to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required
to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside,
if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways,
to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the
reserve funds are not distributable as cash dividends except in the event of liquidation.
In
addition, pursuant to the EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us
by our PRC subsidiaries are subject to withholding tax at a rate of 10% unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises
are incorporated.
Under
existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments
and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the State
Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing
exchange restrictions, without prior approval of SAFE, cash generated from operations in China may be used to pay dividends to
our company. Taizhou Fuling may go to a licensed bank to remit its after-tax profits out of China. Nevertheless, the bank will
require Taizhou Fuling to produce the following documents for verification before it may transfer the dividends to an overseas
bank account of Taizhou Fuling’s parent company: (1) tax payment statement and tax return; (2) auditor’s report issued
by a Chinese certified public accounting firm confirming the availability of profits and dividends for distribution in the current
year; (3) the Board minutes authorizing the distribution of dividends to its shareholders; (4) the foreign exchange registration
certificate issued by SAFE; (5) the capital verification report issued by a Chinese certified public accounting firm; (6) if the
declared dividends will be distributed out of accumulated profits earned in prior years, Taizhou Fuling must appoint a Chinese
certified public accounting firm to issue an auditors’ report to the bank to certify Taizhou Fuling’s financial position
during the years from which the profits arose; and (7) other information as required by SAFE.
B.
Significant Changes
We
have not experienced any significant changes since the date of our audited consolidated financial statements included in this
annual report.
Item
9.
|
The
Offer and Listing
|
A.
Offer and listing details
Our
Ordinary Shares have been listed on the Nasdaq Capital Market since November 4, 2015 under the symbol “FORK.” The
table below shows, for the periods indicated, the high and low market prices for our shares.
|
|
Market Price Per Share
|
|
|
|
High
|
|
|
Low
|
|
Yearly:
|
|
|
|
|
|
|
2015 (from November 4, 2015)
|
|
$
|
5.27
|
|
|
|
2.24
|
|
2016
|
|
$
|
3.45
|
|
|
|
1.68
|
|
2017
|
|
$
|
3.70
|
|
|
|
2.30
|
|
2018
|
|
$
|
5.20
|
|
|
|
2.35
|
|
2019 (through April 2, 2019)
|
|
$
|
3.89
|
|
|
|
2.12
|
|
Quarterly:
|
|
|
|
|
|
|
|
|
First quarter 2017
|
|
$
|
3.70
|
|
|
|
2.30
|
|
Second quarter 2017
|
|
$
|
3.75
|
|
|
|
2.65
|
|
Third quarter 2017
|
|
$
|
6.00
|
|
|
|
3.10
|
|
Fourth quarter 2017
|
|
$
|
6.00
|
|
|
|
3.55
|
|
First quarter 2018
|
|
$
|
5.20
|
|
|
|
3.75
|
|
Second quarter 2018
|
|
$
|
4.35
|
|
|
|
3.75
|
|
Third quarter 2018
|
|
$
|
4.00
|
|
|
|
2.35
|
|
Fourth quarter 2018
|
|
$
|
4.29
|
|
|
|
3.01
|
|
First quarter 2019
|
|
$
|
3.89
|
|
|
|
2.12
|
|
Monthly:
|
|
|
|
|
|
|
|
|
October 2018
|
|
$
|
4.29
|
|
|
|
3.42
|
|
November 2018
|
|
$
|
3.77
|
|
|
|
3.01
|
|
December 2018
|
|
$
|
4.29
|
|
|
|
3.40
|
|
January 2019
|
|
$
|
3.89
|
|
|
|
3.50
|
|
February 2019
|
|
$
|
3.89
|
|
|
|
2.32
|
|
March 2019
|
|
$
|
3.14
|
|
|
|
2.12
|
|
B.
Plan of distribution
Not
applicable for annual reports on Form 20-F.
C.
Markets
Our
Ordinary Shares are listed on the Nasdaq Capital Market under the symbol “FORK.”
D.
Selling shareholders
Not
applicable for annual reports on Form 20-F.
E.
Dilution
Not
applicable for annual reports on Form 20-F.
F.
Expenses of the issue
Not
applicable for annual reports on Form 20-F.
Item
10.
|
Additional
Information
|
A.
Share capital
Not
applicable for annual reports on Form 20-F.
B.
Memorandum and articles of association
The
information required by this item is incorporated by reference to the material headed “Description of Share Capital”
in our Registration Statement on Form F-1, File no. 333-205894, filed with the SEC on July 28, 2015, as amended.
C.
Material contracts
We
have not entered into any material contracts other than in the ordinary course of business and otherwise described elsewhere in
this annual report.
D.
Exchange controls
Foreign
Currency Exchange
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under
the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related
foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated
loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency
loans to our PRC subsidiaries.
In
August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the
Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion
by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used.
In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under
SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise
may only be used for purposes within the business scope approved by the applicable government authority and may not be used for
equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted
from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without
SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have
not been used.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular,
the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange
capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign
exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or
verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible
previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration
over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration
by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration
and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information
provided by SAFE and its branches.
We
typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will
apply to obtain the relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE
Circular 75
Under
the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Roundtrip Investment
Through Offshore Special Purpose Vehicles, or SAFE Circular 75, issued by SAFE on October 21, 2005 and its implementation rules,
a PRC resident (whether a natural or legal person) is required to complete an initial registration with its local SAFE branch
before incorporating or acquiring control of an offshore special purpose vehicle, or SPV, with assets or equity interests in a
PRC company, for the purpose of offshore equity financing. The PRC resident is also required to amend the registration or make
a filing upon (1) the injection of any assets or equity interests in an onshore company or undertaking of offshore financing,
or (2) the occurrence of a material change that may affect the capital structure of a SPV. SAFE also subsequently issued various
guidance and rules regarding the implementation of SAFE Circular 75, which imposed obligations on PRC subsidiaries of offshore
companies to coordinate with and supervise any PRC-resident beneficial owners of offshore entities in relation to the SAFE registration
process.
Regulation
of Dividend Distribution
The
principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company
Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture
Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends
only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both
PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of
their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is
not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior
fiscal years may be distributed together with distributable profits from the current fiscal year.
E
. Taxation
The
following sets forth the material Cayman Islands, Chinese and U.S. federal income tax consequences related to an investment in
our Ordinary Shares. It is directed to U.S. Holders (as defined below) of our Ordinary Shares and is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This description does
not deal with all possible tax consequences relating to an investment in our Ordinary Shares, such as the tax consequences under
state, local and other tax laws.
The
following brief description applies only to U.S. Holders (defined below) that hold Ordinary Shares as capital assets and that
have the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect
as of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of
this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the
foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described
below.
The
brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are
a beneficial owner of shares and you are, for U.S. federal income tax purposes,
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an
individual who is a citizen or resident of the United States;
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a
corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the
United States, any state thereof or the District of Columbia;
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an
estate whose income is subject to U.S. federal income taxation regardless of its source; or
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a
trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S.
persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to
be treated as a U.S. person.
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WE
URGE HOLDERS OF OUR SHARES TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
People’s
Republic of China Enterprise Taxation
The
following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings,
which will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”
We
are a holding company incorporated in the Cayman Islands and we gain substantial income by way of dividends paid to us from our
PRC subsidiaries. The EIT Law and its implementation rules provide that China-sourced income of foreign enterprises, such as dividends
paid by a PRC subsidiary to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding
tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that
provides for a preferential tax rate or a tax exemption.
Under
the EIT Law, an enterprise established outside of China with a “de facto management body” within China is considered
a “resident enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for enterprise
income tax purposes. Although the implementation rules of the EIT Law define “de facto management body” as a managing
body that actually, comprehensively manage and control the production and operation, staff, accounting, property and other aspects
of an enterprise, the only official guidance for this definition currently available is set forth in SAT Notice 82, which provides
guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as
an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise
group as its primary controlling shareholder. Although FGI does not have a PRC enterprise or enterprise group as our primary controlling
shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of SAT Notice 82, in
the absence of guidance specifically applicable to us, we have applied the guidance set forth in SAT Notice 82 to evaluate the
tax residence status of FGI and its subsidiaries organized outside the PRC.
According
to SAT Notice 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having
a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only
if all of the following criteria are met: (i) the places where senior management and senior management departments that are responsible
for daily production, operation and management of the enterprise perform their duties are mainly located within the territory
of China; (ii) financial decisions (such as money borrowing, lending, financing and financial risk management) and personnel decisions
(such as appointment, dismissal and salary and wages) are decided or need to be decided by organizations or persons located within
the territory of China; (iii) main property, accounting books, corporate seal, the board of directors and files of the minutes
of shareholders’ meetings of the enterprise are located or preserved within the territory of China; and (iv) one half (or
more) of the directors or senior management staff having the right to vote habitually reside within the territory of China.
We
believe that we do not meet some of the conditions outlined in the immediately preceding paragraph. For example, as a holding
company, the key assets and records of FGI, including the resolutions and meeting minutes of our board of directors and the resolutions
and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore
holding companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the
PRC tax authorities. Accordingly, we believe that FGI and its offshore subsidiaries should not be treated as a “resident
enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in SAT Notice 82
were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax
authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as
applicable to our offshore entities, we will continue to monitor our tax status.
The
implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or
(ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or gains
are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the EIT Law, and it may
be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident
enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident enterprises as well
as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and as a result
become subject to PRC withholding tax at a rate of up to 10%.
See
“Risk Factors — Risks Related to Doing Business in China — Under the Enterprise Income Tax Law, we may be classified
as a “Resident Enterprise” of China.”
Our company pays a 17% value added tax and
EIT rates of 15% for Taizhou Fuling (or $1,111,784 in 2018) because it has been certified as a high technology company and thus
enjoys a preferable rate. Great Plastics pays EIT tax at the standard 25% rate (or $221,226 in 2018). If Taizhou Fuling’s
favorable EIT rate were to be terminated or Taizhou Fuling were to fail to qualify to receive this rate, it would be subject to
taxation at the standard EIT rate of 25% for enterprise income taxes, unless we were otherwise to qualify for a decreased tax
rate.
Any
gain or loss recognized by you generally will be treated as United States source gain or loss. However, if we are treated as a
PRC resident enterprise for PRC tax purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of
the tax treaty between the United States and PRC, you may elect to treat such gain as PRC source gain under such treaty and, accordingly,
you may be able to credit the PRC tax against your United States federal income tax liability.
Cayman
Islands Taxation
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to our company
levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or
after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not a party to any double tax treaties.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
United
States Federal Income Taxation
The
following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
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banks;
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financial
institutions;
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insurance
companies;
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regulated
investment companies;
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real
estate investment trusts;
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broker-dealers;
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traders
that elect to mark-to-market;
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U.S.
expatriates;
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tax-exempt
entities;
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persons
liable for alternative minimum tax;
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persons
holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction;
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persons
that actually or constructively own 10% or more of our voting shares;
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persons
who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as consideration; or
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persons
holding our Ordinary Shares through partnerships or other pass-through entities.
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You
are urged to consult your own tax advisors about the application of the U.S. federal income tax rules to your particular circumstances
as well as the state, local, foreign income and other tax consequences of the purchase, ownership and disposition of our Ordinary
Shares.
Taxation
of Dividends and Other Distributions on our Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect
to the Ordinary Shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income
as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated
earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends
will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other
U.S. corporations.
With
respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate
applicable to qualified dividend income, provided that (1) the Ordinary Shares are readily tradable on an established securities
market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States
that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for
either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements
are met. Under U.S. Internal Revenue Service authority, Ordinary Shares are considered for purpose of clause (1) above to be readily
tradable on an established securities market in the United States if they are listed on the Nasdaq Capital Market. You are urged
to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our Ordinary Shares,
including the effects of any change in law after the date of this annual report.
Dividends
will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend
income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit
limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of
tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect
to specific classes of income. For this purpose, dividends distributed by us with respect to our Ordinary Shares will constitute
“passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
To
the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S.
federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Ordinary Shares, and to
the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to
calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution
will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital
gain under the rules described above.
Taxation
of Dispositions of Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange
or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and
your tax basis (in U.S. dollars) in the Ordinary Shares. The gain or loss will generally be capital gain or loss. If you are a
non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Ordinary Shares for more than one year, you will
generally be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such
gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation
purposes.
Passive
Foreign Investment Company
A
non-U.S. corporation is considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any
taxable year if either:
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at
least 75% of its gross income is passive income; or
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at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is
attributable to assets that produce or are held for the production of passive income (the “asset test”).
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We
will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
Based
on the market price of our Ordinary Shares, the value of our assets and the composition of our assets and income, we believe that
we were not a PFIC for our taxable year ended December 31, 2017, 2016 or 2015. However, given the factual nature of the analyses
and the lack of guidance, no assurance can be given. We do not expect to be a PFIC for our taxable year ending December 31, 2018.
However, because PFIC status is a factual determination for each taxable year which cannot be made until the close of the taxable
year, our actual PFIC status will not be determinable until the close of the taxable year and, accordingly, there is no guarantee
that we will not be a PFIC for the current taxable year or any future taxable year.
We
must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from year to
year. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the
market price of our Ordinary Shares, our PFIC status will depend in large part on the market price of our Ordinary Shares. Accordingly,
fluctuations in the market price of the Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC
rules is subject to uncertainty in several respects includingthe composition of our income and assets in a given year. If we are
a PFIC for any year during which you hold Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during
which you hold Ordinary Shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime
by making a “deemed sale” election with respect to the Ordinary Shares.
If
we are a PFIC for any taxable year during which you hold Ordinary Shares, you will be subject to special tax rules with respect
to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including
a pledge) of the Ordinary Shares, unless you make a “mark-to-market” election as discussed below. Distributions you
receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the
three preceding taxable years or your holding period for the Ordinary Shares will be treated as an excess distribution. Under
these special tax rules:
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the
excess distribution or gain will be allocated ratably over your holding period for the Ordinary Shares;
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the
amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC,
will be treated as ordinary income, and
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the
amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset
by any net operating losses for such years, and gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated
as capital, even if you hold the Ordinary Shares as capital assets.
A
U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to
elect out of the tax treatment discussed above. If you make a mark-to-market election for the Ordinary Shares, you will include
in income each year an amount equal to the excess, if any, of the fair market value of the Ordinary Shares as of the close of
your taxable year over your adjusted basis in such Ordinary Shares. You are allowed a deduction for the excess, if any, of the
adjusted basis of the Ordinary Shares over their fair market value as of the close of the taxable year. However, deductions are
allowable only to the extent of any net mark-to-market gains on the Ordinary Shares included in your income for prior taxable
years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition
of the Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any
mark-to-market loss on the Ordinary Shares, as well as to any loss realized on the actual sale or disposition of the Ordinary
Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such Ordinary
Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market
election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except
that the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation of Dividends
and Other Distributions on our Ordinary Shares” generally would not apply.
The
mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other
market (as defined in applicable U.S. Treasury regulations), including the Nasdaq Capital Market. If the Ordinary Shares are regularly
traded on the Nasdaq Capital Market and if you are a holder of Ordinary Shares, the mark-to-market election would be available
to you were we to be or become a PFIC.
Alternatively,
a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect
out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC
will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings
and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S.
Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We
do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election.
If you hold Ordinary Shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form
8621 regarding distributions received on the Ordinary Shares and any gain realized on the disposition of the Ordinary Shares.
You
are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Ordinary Shares and
the elections discussed above.
Information
Reporting and Backup Withholding
Dividend
payments with respect to our Ordinary Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be
subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding
will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required
certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are
required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9.
You are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding
rules.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income
tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold
taxes for individual shareholders.
Under
the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating
to ordinary shares, subject to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain
financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial
Assets, with their tax return for each year in which they hold ordinary shares. U.S. Holders are urged to consult their tax advisors
regarding the application of the U.S. information reporting and backup withholding rules.
F.
Dividends and paying agents
Not
applicable for annual reports on Form 20-F.
G.
Statement by experts
Not
applicable for annual reports on Form 20-F.
H.
Documents on display
We
are subject to the information requirements of the Exchange Act. In accordance with these requirements, the Company files reports
and other information with the SEC. You may read and copy any materials filed with the SEC at the Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports and other information regarding
registrants that file electronically with the SEC.
I.
Subsidiary Information
Not
applicable.
Item
11.
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Quantitative
and Qualitative Disclosures About Market Risk
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Interest
Rate Risk
Our
exposure to interest rate risk primarily relates to excess cash invested in short-term instruments with original maturities of
less than a year and long-term held-to-maturity securities with maturities of greater than a year. Investments in both fixed rate
and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected
if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes
in interest rates, or we may suffer losses in principal if we have to sell securities that have declined in market value due to
changes in interest rates. We have not been, and do not expect to be, exposed to material interest rate risks, and therefore have
not used any derivative financial instruments to manage our interest risk exposure.
In
2018, 2017 and 2016, we had $28.2 million, $22.2 million and $16.5 million weighted outstanding bank loans, with weighted average
effective interest rate of 4.89%, 5.07% and 4.37% respectively.
As
of December 31, 2018, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming
the amount of bank borrowings outstanding at the end of the year was outstanding for the entire year, profit attributable to equity
owners of our company would have been RMB 2.1 million (0.3 million) lower/higher, respectively, mainly as a result of higher/lower
interest income from our cash and cash equivalents and loan receivables.
As
of December 31, 2018, we had short-term certificates of deposit of $0 million.
Foreign
Exchange Risk
Our
functional currency is the RMB, and our financial statements are presented in U.S. dollar. The RMB depreciated by 1.4% in 2015
and 6.7% in 2016 and appreciated by 6.3% in 2017. The change in the value of RMB relative to the U.S. dollar may affect our financial
results reported in the U.S., dollar terms without giving effect to any underlying change in our business or results of operation.
Currently,
our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars, and our offering proceeds will be denominated
in U.S. dollars. Our exposure to foreign exchange risk will primarily relate to those financial assets denominated in U.S. dollars.
Any significant revaluation of RMB against U.S. dollar may materially affect our earnings and financial position, and the value
of, and any dividends payable on, our Ordinary Shares in U.S. dollars in the future. See “Risk Factors — Risks Related
to Doing Business in China — Fluctuations in exchange rates could adversely affect our business and the value of our securities.”
Commodity
Risk
As a developer and manufacturer of plastic
and paper products, our Company is exposed to the risk of an increase in the price of raw materials. We historically have been
able to pass on price increases to customers by virtue of pricing terms that vary with changes in resin prices, but we have not
entered into any contract to hedge any specific commodity risk. Moreover, our Company does not purchase or trade on commodity instruments
or positions; instead, it purchases commodities for use.
Item
12.
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Description
of Securities Other than Equity Securities
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With
the exception of Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and
12.D.4, this Item 12 is not applicable, as the Company does not have any American Depositary Shares.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Fuling
Global Inc. (“Fuling Global”) is a Cayman Islands corporation established on January 19, 2015.
Total
Faith Holdings Limited (“Total Faith”) is a wholly-owned subsidiary of Fuling Global formed in accordance with laws
and regulations of the British Virgin Islands in April 2004.
Fuling
Global and its subsidiary Total Faith are holding companies whose only asset, held through a subsidiary, is 100% of the registered
capital of Taizhou Fuling Plastics Co., Ltd. (“Taizhou Fuling”), as well as 49% ownership of Domo Industry Inc. (“Domo”).
Taizhou
Fuling was established in October 1992 under the laws of the People’s Republic of China (“China” or “PRC”)
with initial capital of $0.51 million. After several registered capital increases and capital contributions, the registered capital
of Taizhou Fuling was increased to $21.36 million in November 2015.
Taizhou
Fuling has four wholly-owned subsidiaries, Zhejiang Great Plastics Technology Co., Ltd. (“Great Plastics”), Direct
Link USA LLC (“Direct Link”), Fuling Plastic USA, Inc. (“Fuling USA”) and Wenling Changli Import and Export
Co., Ltd (“Wenling Changli”), which was established in September 2016 in China.
Great
Plastics was incorporated in China in March 2010 and principally engaged in the production of straw items. Direct Link was incorporated
in the State of Delaware in December 2011 and serves as an import trading company of Taizhou Fuling in the United States (“U.S.”).
Fuling USA was incorporated in the Commonwealth of Pennsylvania in May 2014, as a wholly-owned subsidiary of Taizhou Fuling. In
2015 Fuling USA established the Company’s first production factory in the U.S., which principally engages in the production
of plastic straw items. Prior to the incorporation of Fuling USA, Taizhou Fuling wholly owned another subsidiary incorporated
in 2009 in the State of New York, named Fuling Plastics USA Inc. (“Old Fuling USA”). Old Fuling USA served as one
of the trading entities of Taizhou Fuling in the U.S. until early 2014 and its business was discontinued and transferred over
to the new Fuling USA when the Company decided to set up the new factory in Allentown, Pennsylvania. Old Fuling USA was dissolved
on April 8, 2015.
Domo
is a U.S. company established in the State of New York in October 2007. Total Faith owns 49% of its equity interest. However,
Total Faith holds 2 out of 3 seats and has a majority of the voting rights on the board of directors. The Board of Directors of
Domo is the controlling decision-making body with respect to Domo instead of the equity holders. The number of seats in the Board
empowers Total Faith the ability to control Domo’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholders’ approval. In addition, Domo’s equity at risk is not sufficient to
permit it to carry on its activities without additional subordinated financial support from Total Faith and Domo is highly relying
on the financial support from the Company. Total Faith is obligated to absorb a majority of the risk of loss from Domo’s
activities and to receive majority of Domo’s residual returns. Based on these facts, Total Faith has gained effective control
over Domo and Domo is considered a Variable Interest Entity (“VIE”) under Accounting Standards Codification (“ASC”)
810-10-05-08A. Accordingly, Total Faith consolidates Domo’s operating results, assets and liabilities.
Fuling Global, Total Faith, Domo, Taizhou Fuling and Taizhou
Fuling’s subsidiaries (herein collectively referred to as the “Company”) are engaged in the production and distribution
of plastic and paper serviceware in China, Europe and U.S. Products exported to the U.S. and Europe are primarily sold to major
fast food restaurant chains and wholesalers.
On
November 22, 2018, Great Plastics signed sales contracts with a third party to sell the land and buildings previously used as
one of its manufacturing factories in China (aka, the “Sanmen Factory”) for total cash consideration of RMB 40.2
million (approximately US$5.8 million) (see Note 5 and 6). The Company sold all related machines and equipment to Taizhou
Fuling and Zhejiang Great New Materials Co., Ltd. (“Great NM”). Great NM is a company owned by direct relatives
of Taizhou Fuling’s officials. The Company plans to dissolve Great Plastics in 2019. Certain prior period amounts
of Great Plastics have been reclassified to conform to the current period presentation as discontinued operation.
Such reclassifications had no effect on net income or cash flows as previously reported.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Presentation
The
Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in
the United States of America (“US GAAP”). The consolidated financial statements include the financial statements of
Fuling Global, Total Faith, Taizhou Fuling and its subsidiaries and VIE. All significant intercompany balances and transactions
have been eliminated in consolidation.
In
accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial support from other parties or whose equity holders
lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting
purposes.
The
Company has concluded that Domo is a VIE, based on the facts that Total Faith has a majority of voting rights on the board of
directors and is obligated to absorb a majority of the risk of loss from Domo’s economic performance. Based on our evaluation
of the VIE, we are the primary beneficiary of its risks and rewards; therefore, we consolidate Domo for financial reporting purposes.
The
following tables set forth the assets, liabilities, results of operations and changes in cash and cash equivalents of the VIE,
which were included in the Company’s consolidated balance sheets, statements of income and comprehensive income and cash
flows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
4,395,466
|
|
|
$
|
3,053,731
|
|
Non-current assets
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
|
4,395,466
|
|
|
|
3,053,731
|
|
|
|
|
|
|
|
|
|
|
Third-party liabilities
|
|
|
(635,845
|
)
|
|
|
(575,935
|
)
|
Intercompany payables*
|
|
|
(3,664,964
|
)
|
|
|
(2,189,169
|
)
|
Total liabilities
|
|
|
(4,300,809
|
)
|
|
|
(2,765,104
|
)
|
Net assets
|
|
$
|
94,657
|
|
|
$
|
288,627
|
|
|
*
|
Payables
to Taizhou Fuling are eliminated upon consolidation.
|
|
|
For the years ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,858,274
|
|
|
$
|
9,744,914
|
|
|
$
|
7,928,478
|
|
Net income (loss)
|
|
$
|
(204,967
|
)
|
|
$
|
25,246
|
|
|
$
|
39
|
|
|
|
For the years ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(1,021,593
|
)
|
|
$
|
296,037
|
|
|
$
|
(1,006,413
|
)
|
Net cash (used in) provided by financing activities*
|
|
$
|
1,475,795
|
|
|
$
|
(376,338
|
)
|
|
$
|
1,153,126
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
454,202
|
|
|
$
|
(80,301
|
)
|
|
$
|
146,713
|
|
|
*
|
Intercompany
financing activities are eliminated upon consolidation.
|
The
Company has the power to direct activities of the VIE and can have assets transferred freely out of the VIE without restrictions.
Therefore, the Company considers that there is no asset of the VIE that can only be used to settle obligations of the VIE. The
creditors of the VIE’s third-party liabilities do not have recourse to the general credit of the primary beneficiary in
normal course of business.
Non-controlling
interests
Non-controlling
interests represents the individual shareholder’s proportionate share of 51% of equity interest in Domo.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information
as of the date of the financial statements.
Significant
estimates required to be made by management include, but are not limited to, the valuation of accounts receivable, inventories,
advances to suppliers, useful lives of property, plant and equipment, intangible assets, and the recoverability of long-lived
assets. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of
purchase to be cash equivalents.
Restricted
Cash
Restricted
cash consists of cash equivalents used as collateral to secure short-term bank notes payable and bank borrowings. The Company
is required to keep certain amounts on deposit that are subject to withdrawal restrictions. Upon the maturity of the bank acceptance
notes and bank borrowings, the Company is required to deposit the remainder to the escrow account to settle the bank notes payable
and bank borrowings. The notes payable and bank borrowings with security deposits are generally short term in nature due to their
short maturity period of three months to one year; thus, restricted cash is classified as a current asset.
As
of December 31, 2018 and 2017, the Company had restricted cash of $2,396,993 and $3,767,081, respectively, of which $1,439,064
and $3,053,622, respectively, was related to the bank acceptance notes payable (see Note 8), and $649,675 and $565,821, respectively,
was related to the letters of credit (see Note 11). The remaining $308,254 and $147,638, respectively, were related to other miscellaneous
deposits made in bank.
Certificates
of Deposit
As
of December 31, 2018 and 2017, certificates of deposit with original maturities of more than three months amounted to $0 and $105,707,
respectively.
Accounts
Receivable
Accounts
receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The
Company usually grants credit to customers with good credit standing with a maximum of 90 days and determines the adequacy of
reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes
a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due.
The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision
on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge
recorded in the consolidated statements of income and comprehensive income. Actual amounts received may differ from management’s
estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance
for doubtful accounts after management has determined that the likelihood of collection is not probable.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Costs include the cost of raw materials, freight, direct labor and related
production overhead. The cost of inventories is calculated using the weighted average method. Any excess of the cost over the
net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories.
Net
realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products.
Property,
Plant and Equipment
Property
and equipment are stated at cost. The straight-line depreciation method is used to compute depreciation over the estimated useful
lives of the assets, as follows:
Items
|
|
Useful
life
|
Property
and buildings
|
|
10–20
years
|
Leasehold
improvements
|
|
Lesser
of useful life and
lease term
|
Machinery
equipment
|
|
3–10
years
|
Transportation
vehicles
|
|
4–10
years
|
Office
equipment and furniture
|
|
3–5
years
|
Expenditures
for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred.
Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost
and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss
is recognized in the statement of income in other income and expenses.
Intangible
Assets
Intangible
assets consist primarily of land use rights, trademark and patents. Under the PRC law, all land in the PRC is owned by the government
and cannot be sold to an individual or company. The government grants individuals and companies the right to use parcels of land
for specified periods of time. These land use rights are sometimes referred to informally as “ownership.” Land use
rights are stated at cost less accumulated amortization. Intangible assets are amortized using the straight-line method with the
following estimated useful lives:
Items
|
|
Useful
life
|
Land
use rights
|
|
50
years
|
Trademarks
|
|
10
years
|
Patents
|
|
7-10
years
|
Impairment
of Long-lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below
the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments
of these assets as of December 31, 2018 and 2017.
Revenue
Recognition
The
Company follows paragraph 606 of the FASB Accounting Standards Codification for revenue recognition and ASU 2014-09. On January
1, 2018, the Company adopted ASU 2014-09, which is a comprehensive new revenue recognition model that requires revenue to
be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration
expected to be received in exchange for those goods or services. The Company considers revenue realized or realizable and
earned when all the five following criteria are met: (1) Identify the Contract with a Customer, (2) Identify the Performance Obligations
in the Contract, (3) Determine the Transaction Price, (4) Allocate the Transaction Price to the Performance Obligations in the
Contract, and (5) Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation. Results for reporting periods
beginning after January 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be
reported under the previous accounting standards. The Company has assessed the impact of the guidance by reviewing its existing
customer contracts and current accounting policies and practices to identify differences that will result from applying the new
requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control
and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing
and pattern of revenue recognition for its current revenue streams in scope of Topic 606 and therefore there was no material changes
to the Company’s consolidated financial statements upon adoption of ASC 606, and there have not been any significant changes
to our business processes, systems, or internal controls as a result of implementing the standard.
Income
Taxes
The
Company accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
The
provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold
for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return.
This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related
disclosures. The Company does not believe that there was any uncertain tax position at December 31, 2018 and 2017.
To
the extent applicable, the Company records interest and penalties as general and administrative expenses. The statute of limitations
for the Company’s U.S. federal income tax returns and certain state income tax returns subject to examination by tax authorities
for three years from the date of filing. As of December 31, 2018, the tax years ended December 31, 2014 through December 31, 2017
for the Company’s PRC subsidiaries remain open for statutory examination by PRC tax authorities. As of December 31, 2018,
the tax years ended December 31, 2011 through December 31, 2017 for the Company’s U.S. subsidiaries remain open for statutory
examination by U.S. tax authorities.
Value
Added Tax (“VAT”)
Sales
revenue represents the invoiced value of goods, net of VAT. The VAT is based on gross sales price and VAT rates range up to 17%,
depending on the type of products sold. The VAT may be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing or acquiring its finished products. Further, when exporting goods, the exporter is entitled
to some or all of the refund of the VAT paid or assess. Since a majority of the Company’s products are exported to the U.S.
and Europe, the Company is eligible for VAT refunds when the Company completes all the required tax filing procedures.
All
of the VAT returns of the Company have been and remain subject to examination by the tax authorities for five years from the date
of filing.
Foreign
Currency Translation
The
Company’s principal country of operations is the PRC. The financial position and results of its operations are determined
using RMB, the local currency, as the functional currency. Our financial statements are reported using U.S. Dollars. The results
of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during
the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the
applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical
rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate,
amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period
to period are included as a separate component of accumulated other comprehensive income included in statement of changes in equity.
Gains and losses from foreign currency transactions are included in the consolidated statement of income and comprehensive income.
The
value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s
political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition
in terms of US$ reporting. The following table outlines the currency exchange rates that were used in creating the consolidated
financial statements in this report:
|
|
December 31,
2018
|
|
December 31,
2017
|
|
December 31,
2016
|
|
|
|
|
|
|
|
Period-end
spot rate
|
|
US
$1=RMB 6.8776
|
|
US
$1=RMB 6.5074
|
|
US
$1=RMB 6.94477
|
|
|
|
|
|
|
|
Average
rate
|
|
US
$1=RMB 6.6163
|
|
US
$1=RMB 6.7578
|
|
US
$1=RMB 6.64410
|
Fair
Value of Financial Instruments
ASC
825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires
entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used
to measure fair value are as follows:
|
●
|
Level
1 - Quoted prices in active markets for identical assets and liabilities.
|
|
●
|
Level
2 - Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant
unobservable inputs.
|
The
Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents,
restricted cash, accounts receivable, advance to vendors, accounts payable, accrued expenses, advances from customers, notes payable
to approximate the fair value of the respective assets and liabilities at December 31, 2018 and 2017 based upon the short-term
nature of the assets and liabilities.
The
Company believes that the carrying amount of the short-term borrowings approximates fair value at December 31, 2018 and 2017 based
on the terms of the borrowings and current market rates as the rate is reflective of the current market rate.
Concentrations
and Credit Risk
A
majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’
assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by
the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be
processed through the PBOC or other China foreign exchange regulatory bodies that require certain supporting documentation in
order to affect the remittance.
As
of December 31, 2018 and 2017, $4,116,684 and $7,027,894, respectively, of the Company’s cash and cash equivalents, certificates
of deposit and restricted cash were on deposit at financial institutions in the PRC where there currently is no rule or regulation
requiring such financial institutions to maintain insurance to cover bank deposits in the event of bank failure.
Substantially
all of the Company’s sales are made to customers that are located primarily in the USA and Europe. The Company’s operating
results could be adversely affected by the government policy on exporting business, foreign exchange rate fluctuation, and local
market condition change. The Company has a concentration of its revenues and receivables with specific customers. For the year
ended December 31, 2018, no customer accounted for more than 10% of total revenue. For the year ended December 31, 2017,
one customer accounted for 12% of total revenue. As of December 31, 2018, one customer’s account receivable accounted
for 14% of the total outstanding accounts receivable balance. As of December 31, 2017, one customer’ account receivable
accounted for 18% of the total outstanding accounts receivable balance.
For
the year ended December 31, 2018, the Company purchased approximately 12% of its raw materials from its one
largest supplier. For the year ended December 31, 2017, the Company purchased approximately 12% and 11% of its raw materials
from its two largest suppliers, respectively. As of December 31, 2018, advanced payments to two major suppliers
accounted for 20% and 15% of the total advance payments outstanding. As of December 31, 2017, no supplier accounted for more
than 10% of the total advance payments outstanding.
A
loss of either of these customers or suppliers could adversely affect the operating results or cash flows of the Company.
Risks
and Uncertainties
The
major operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results
of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of
the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes
in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations
and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in
Note 1, this may not be indicative of future results.
Recent
Accounting Pronouncements
New
Accounting Pronouncements Recently Adopted
On
April 1, 2018, we adopted ASU 2016-18, Restricted Cash – A Consensus of the FASB Emerging Issues Task Force, (“ASU
2016-18”), which amends ASC 230, Statement of Cash Flows, to clarify guidance on the classification and presentation of
restricted cash in the statement of cash flows using the full retrospective method. Adoption of this standard did not have a material
impact on our consolidated financial statements. See our consolidated statements of cash flows for the reconciliation
of cash presented in the statements of cash flows to the cash presented on the balance sheet.
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) effective April 1,
2018 using the retrospective transition method. The core principle of the new accounting standard is to recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. In addition, the adoption of this new accounting standard resulted in increased
disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers. Adoption of this standard did not result in significant changes to the Company’s
accounting policies, business processes, systems or controls, or have a material impact on the Company’s financial position,
results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast.
New
Accounting Pronouncements Not Yet Adopted
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation, which simplifies the accounting for share-based
payments granted to nonemployees for goods and services. Under this ASU, most of the guidance on such payments to nonemployees
would be aligned with the requirements for share-based payments granted to employees. This ASU is effective for annual reporting
periods beginning after December 15, 2018. Early adoption of this ASU is permitted. The Company does not expect adoption of this
ASU to have a material impact on its Consolidated Financial Statements.
In
February 2016, the FASB issued ASU 2018-20, Leases (Topic 842), to increase transparency and comparability among organizations
by recognizing leases assets and lease liabilities on the balance sheet and disclosing key information about lease transactions.
This ASU is effective for annual reporting periods beginning after December 15, 2018. Early adoption of this ASU is permitted.
The Company is evaluating the effect of the pronouncement on the financial statements.
NOTE
3 – ACCOUNTS RECEIVABLE, NET
Accounts
receivable consisted of the following:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Trade accounts receivable
|
|
$
|
27,984,656
|
|
|
$
|
23,127,679
|
|
Less: allowance for doubtful accounts
|
|
|
(223,700
|
)
|
|
|
(192,434
|
)
|
Accounts receivable, net
|
|
$
|
27,760,956
|
|
|
$
|
22,935,245
|
|
NOTE
4 – INVENTORY, NET
Inventories
consisted of the following:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
7,011,718
|
|
|
$
|
4,587,519
|
|
Work-in-progress
|
|
|
1,387,111
|
|
|
|
1,594,096
|
|
Finished goods
|
|
|
14,047,720
|
|
|
|
13, 277,742
|
|
Less: inventory valuation allowance
|
|
|
(171,936
|
)
|
|
|
(139,291
|
)
|
Total inventory
|
|
$
|
22,274,613
|
|
|
$
|
19,320,066
|
|
NOTE
5 – PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net consisted of the following:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Property and Buildings
|
|
$
|
26,766,432
|
|
|
$
|
18,251,057
|
|
Leasehold improvement
|
|
|
2,376,165
|
|
|
|
1,862,388
|
|
Machinery and equipment (1)
|
|
|
34,006,697
|
|
|
|
31,985,871
|
|
Automobiles
|
|
|
1,006,032
|
|
|
|
1,021,208
|
|
Office and electric equipment
|
|
|
948,090
|
|
|
|
813,073
|
|
Subtotal
|
|
|
65,103,416
|
|
|
|
53,933,597
|
|
Construction in progress
|
|
|
2,393,006
|
|
|
|
2,570,443
|
|
Less: accumulated depreciation
|
|
|
(15,659,789
|
)
|
|
|
(12,823,668
|
)
|
Property and equipment, net
|
|
$
|
51,836,633
|
|
|
$
|
43,680,372
|
|
|
(1)
|
A
total amount of $11,787,174 machinery was related to the sale leaseback transaction (see Note 10).
|
Depreciation
expense was $4,227,620, $3,437,207 and $2,217,994 for the years ended December 31, 2018, 2017 and 2016, respectively.
Construction
in progress represents costs of construction incurred for the Company’s new plant and equipment. The Company started the
first phase of the construction for its facility expansion in China (“Phase I”) in April 2016 in China. For the year
ended December 31, 2017, construction in progress of approximately $19.3 million was completed and was transferred to
property, plant and equipment for Phase I.
In
the beginning of August 2017, the Company started its second phase of the construction for its facility expansion in China
(“Phase II”). Phase II includes construction of a new plant, an office building and two dormitory buildings. The
construction is expected to be completed before the end of 2019 and the total construction cost of Phase II is expected
to be $13.1 million. For the year ended December 31, 2018, construction in progress of approximately $9.9 million was
completed and was transferred to property, plant and equipment for Phase II. The Company expects to fulfill the payments
using cash generated from operating activities and additional loans borrowed from local banks in case any shortage of cash on
hand in the future.
On November 22, 2018, Great Plastics sold its manufacturing factories to an unrelated third party for
total cash consideration of RMB 40.2 million (approximately US$5.8 million). The net book value of the plant and properties
disposed in the transaction amounted to RMB 25.7 million (approximately US$3.7 million), and the net book value of the
intangible assets disposed in the transaction amounted to RMB 8.1 million (approximately US$1.2 million). Tax payable related
to this transaction amounted RMB 3.7 million (approximately US$0.5 million). Total net value disposed and tax amounted RMB
35.7 million (approximately US$5.4 million). Gain from disposal of plant and properties and of intangible assets amounted to
approximately RMB 2.7 million (approximately US$0.4 million).
NOTE
6 – INTANGIBLE ASSETS, NET
Intangible
assets, net consisted of the following:
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Land use rights
|
|
$
|
8,731,398
|
|
|
$
|
9,228,119
|
|
Trademarks
|
|
|
13,718
|
|
|
|
9,802
|
|
Patents
|
|
|
7,365
|
|
|
|
5,782
|
|
Total
|
|
|
8,752,481
|
|
|
|
9,243,703
|
|
Less: accumulated amortization
|
|
|
(594,565
|
)
|
|
|
(446,122
|
)
|
Intangible assets, net
|
|
$
|
8,157,916
|
|
|
$
|
8,797,581
|
|
Amortization
expense was $179,268, $174,303 and $136,199 for the years ended December 31, 2018, 2017 and 2016, respectively.
Land
use right of Great was disposed by Great on November 22, 2018 (See Note 5).
Estimated
future amortization expense for intangible assets is as follows:
Periods ending December 31,
|
|
Amortization expense
|
|
|
|
|
|
2019
|
|
$
|
176,191
|
|
2020
|
|
|
176,191
|
|
2021
|
|
|
175,991
|
|
2022
|
|
|
175,766
|
|
2023
|
|
|
175,331
|
|
Thereafter
|
|
|
7,278,446
|
|
|
|
$
|
8,157,916
|
|
NOTE
7 – SHORT-TERM AND LONG-TERM BORROWINGS
Short-term
Borrowings
Short-term
borrowings represent amounts due to various banks and other companies normally maturing within one year. The principal of the
borrowings is due at maturity. Accrued interest is due either monthly or quarterly.
Short-term
borrowings consisted of the following:
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Agricultural Bank of China (“ABC”)
|
|
(1)
|
|
$
|
8,622,194
|
|
|
$
|
11,831,148
|
|
China Merchants Bank (“CMB”)
|
|
(2)
|
|
|
1,696,441
|
|
|
|
3,073,424
|
|
Industrial and Commercial Bank of China (“ICBC”)
|
|
(3)
|
|
|
4,557,315
|
|
|
|
4,019,908
|
|
Bank of China (“BOC”)
|
|
(4)
|
|
|
2,724,793
|
|
|
|
2,274,333
|
|
East West Bank (“EWB”)
|
|
(5)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Postal Savings Bank of China (“PSBC”)
|
|
(6)
|
|
|
-
|
|
|
|
4,046,597
|
|
Pennsylvania Industrial Development Authority – current portion of long-term borrowing (see “long-term borrowing” below)
|
|
|
|
|
89,898
|
|
|
|
88,339
|
|
East West Bank loan – current portion of long-term borrowing (see “long-term borrowing” below)
|
|
|
|
|
200,000
|
|
|
|
83,333
|
|
Total
|
|
|
|
$
|
19,890,641
|
|
|
$
|
27,417,082
|
|
|
(1)
|
During
the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank loan agreements with ABC for a total
amount of $8,622,194. The terms of these loans are six months with variable interest rates based on the prevailing interest rates,
respectively. The effective rates are from 4.57% to 5.15% per annum.
|
During
fiscal year 2017, Taizhou Fuling entered into a series of short-term bank loan agreements with ABC for a total amount of $11,831,148.
The terms of these loans are six to twelve months with variable interest rates based on the prevailing interest rates. The effective
rates were from 4.57% to 4.90% per annum. As of December 31, 2018, $11,831,148 of them had been repaid upon maturity.
In
February 2017, Great Plastics entered into a short-term bank loan agreement with ABC for $691,520. The terms of the loan are twelve
months with a variable interest rate based on the prevailing interest rate. The effective rates are 5.66% per annum. This loan
was fully repaid in July 2017 prior to its maturity.
These
loans were guaranteed by the assets of a third party guaranty company and a shareholder of the Company. The third party guaranty
company charges 2% of total loan amount.
|
(2)
|
During
year ended December 31, 2018, Taizhou Fuling entered into a series of short-term bank borrowing agreements with CMB for a total
amount of approximately $6.3 million (RMB 43.4 million). The terms of these loans are five to twelve months with variable interest
rates based on the prevailing interest rates. The effective rates were from 2.40% to 6.09% per annum. The loans are guaranteed
by Special Plastics and Taizhou Fuling’s general manager and Chair of the Board. As of December 31, 2018, $4,586,234 had
been repaid in full upon maturity.
|
In
January, March, July and December 2017, Taizhou Fuling entered into four short-term bank borrowing agreements for approximately
$4.5 million (RMB 29.4 million) with CMB for twelve, six, six and twelve months, respectively. The effective rates were 6.09%,
2.67%, 1.99% and 6.09% per annum, respectively. The loans are guaranteed by Special Plastics and Taizhou Fuling’s general
manager and Chair of the Board. As of December 31, 2018, these loans had been repaid in full upon maturity.
|
(3)
|
During
the year ended December 31, 2018, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount
of $4,557,315. The terms of these loans are five to twelve months with the interest rates ranged from 3.47% to 5.44% per annum.
|
During
2017, Taizhou Fuling entered into a series of short-term loan agreements with ICBC for a total amount of $7,092,174. The terms
of these loans are five to twelve months with the interest rates ranged from 2.14% to 5.00% per annum. As of December 31, 2018,
these loans had been repaid upon maturity.
|
(4)
|
During
the year ended December 31, 2018 and the year ended December 31, 2017, Taizhou Fuling entered into a series of short-term bank
borrowing agreements and other financing agreements with BOC. The terms of the loans are three to twelve months, with fixed interest
rates based on London InterBank Offered Rate (“LIBOR”) (for loans dominated in USD) or prime loan rates issued by
People’s Bank of China (for loans dominated in RMB), plus certain base points. The effective interest rates vary from 3.30%
to 5.01% per annum. The loans to Taizhou Fuling are guaranteed by the Chief Executive Officer (“CEO”).
|
|
(5)
|
On March 9, 2017,
Direct Link entered into a line of credit agreement with East West Bank for $2,000,000 for one year. The annual interest rate
is equivalent to LIBOR rate plus 2.75%. Direct Link was required to make restricted deposit of $41,900 for one year (which
was released in June 2018) with an initial interest rate of 3.76% per annum. The line of credit is guaranteed by
Fuling Global. The agreements require Direct Link to comply with certain financial covenants and ratios, including to
maintain minimum debt service coverage ratio of 1.40 times and to maintain maximum total debt to equity ratio of 3.0 times
etc. Direct Link will be measured semi-annually at December 31th and December 31st. Direct Link was not in compliance
as of December 31, 2018. On April 7, 2017, Direct Link drew down $1,500,000 with the effective rate of 3.86% per annum.
On December 1, 2017, Direct Link drew down another $500,000 with the effective rate of 4.45% per annum. Interest expense
incurred on this loan for the year ended December 31, 2018 and 2017 were $47,955 and $14,942, respectively. On March 14,
2018, East West Bank approved to extend the loan to June 9, 2018. On June 26, 2018, East West Bank again approved to extend
the loan to June 9, 2019. East West Bank had waived financial covenant violations as of December 31, 2018.
|
|
(6)
|
In
January 2018, Taizhou Fuling entered into a short-term bank loan agreement with PSBC for $987,881. The terms of the loan are twelve
months. The effective rates are 2.95% per annum. As of December 31, 2018, this loan had been repaid prior to its maturity.
|
In
November and December 2017, Taizhou Fuling entered into a series of short-term bank loan agreements with PSBC for $2,975,004 and
$1,071,593, respectively. The terms of these loans are twelve and five months, respectively. The effective rates are 2.65% and
4.15% per annum, respectively. As of December 31, 2018, these loans had been repaid upon maturity.
Long-term
Borrowings
Long-term
borrowings represent amounts due to various banks and other companies normally maturing over one year. The principal of the borrowings
is due at maturity. Accrued interest is due either monthly or quarterly.
Long-term
borrowings consisted of the following:
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Pennsylvania Industrial Development Authority – long term
|
|
(1)
|
|
$
|
658,234
|
|
|
$
|
748,132
|
|
Agricultural Bank of China (“ABC”)
|
|
(2)
|
|
|
5,815,982
|
|
|
|
137,088
|
|
East West Bank (“EWB”) – long term
|
|
(3)
|
|
|
729,141
|
|
|
|
916,667
|
|
Total
|
|
|
|
$
|
7,203,357
|
|
|
$
|
1,801,887
|
|
|
(1)
|
On
September 28, 2016, Fuling USA entered into a ten-year Machinery and Equipment Loan Agreement with the Pennsylvania Industrial
Development Authority for $937,600, with fixed interest rate of 1.75%. This loan has been collateralized by the machinery
and equipment, worth approximately $1.72 million. As of December 31, 2018, the amount of long-term borrowing was $748,132, and
it consists of $89,898 of which is due within a year and $658,234 that is due over a year.
|
Future
obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
|
|
|
|
2019
|
|
$
|
89,898
|
|
2020
|
|
|
91,484
|
|
2021
|
|
|
93,098
|
|
2022
|
|
|
94,740
|
|
2023
|
|
|
96,411
|
|
Thereafter
|
|
|
282,501
|
|
Total
|
|
$
|
748,132
|
|
|
(2)
|
In
June 2018, Taizhou Fuling entered into two buyer’s credit Loan Agreements with Agriculture Bank of China Limited for total
of $2,471,792 (RMB 17 million) for 36 months. In July 2018, Taizhou Fuling entered into three buyer’s credit Loan Agreements
with Agriculture Bank of China Limited for total of $3,344,190 (RMB 23 million) for 36 months. The loan bears variable interest
rates based on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 13% of the
prevailing interest rate. As of December 31, 2018, the amount of long-term borrowing was $5,815,982, and the effective rates were
5.37% and 5.23% per annum. The line of credit’s purpose is for inventory purchase. The line of credit is effective for the
period from first day of loan to 36 months after the first day of loan.
|
On
October 31, 2016, Fuling USA entered into a buyer’s credit Loan Agreement with Agricultural Bank of China Limited for a
line of credit in the amount of $5,903,723 (RMB 41 million) for 18 months. The loan bears a variable interest rate based
on the prevailing interest rate set by the People’s Bank of China at the time of borrowing, plus 6% of the prevailing interest
rate. As of December 31, 2017, the amount of long-term borrowing was $137,088, and the effective rate was 5.30%
per annum. The line of credit’s purpose is to acquire equipment. China Export & Credit Insurance Corporation provides
insurance for the line of credit. The line of credit is effective for the period from first day of loan to 18 months after the
first day of loan. As of December 31, 2018, this loan was fully repaid in full upon maturity.
|
(3)
|
On March 9, 2017, Fuling USA entered into a Delayed Draw Term Loan agreement with East West Bank
for $1,000,000. The amount drawn will be turned into a 5-year term loan at LIBOR rate plus 3.00%. The loan is guaranteed by Fuling
Global. Fuling USA is required to make a restricted deposit of $73,336 for one year with an initial interest rate of 4.19% per
annum. The restricted deposit was increased to $121,639 in June 2018. The agreement requires Fuling USA to comply with certain
financial covenants and ratios, including to maintain minimum debt service coverage ratio of 1.25 times and to maintain maximum
total debt to equity ratio of 3.0 times etc. Fuling USA’s compliance with these covenants will be reviewed semi-annually
at December 31th and December 31th. Fuling USA was in compliance as of December 31, 2018. On April 7 and December 1, 2017,
Fuling USA drew down $500,000 (April 2017 Loan) and $500,000 (December 2017 Loan), respectively. April 2017 loan will
expire April 7, 2023 and December 2017 loan will expire on December 1, 2023. Both April 2017 loan and December 2017 loan require
interest only payment for the first year and require interest and principal payments for years from second year to sixth year.
The effective rate was 4.11% per annum. As of December 31, 2018, the amount of long-term borrowing was $929,141, and it consists
of $200,000 of which is due within a year and $729,141 which is due over a year.
|
Future
obligations for payments of this long-term loan are as below:
Twelve months ended December 31,
|
|
|
|
2019
|
|
$
|
200,000
|
|
2020
|
|
|
200,000
|
|
2021
|
|
|
200,000
|
|
2022
|
|
|
200,000
|
|
2023
|
|
|
129,141
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
929,141
|
|
As
of December 31, 2018 and 2017, land use rights in the amount of $7,821,842 and $8,442,532, and property and buildings in the amount
of $14,071,515 and $15,620,048, respectively, were pledged for all the above short-term and long-term borrowings.
NOTE
8 – BANK NOTES PAYABLE
Short-term
bank notes payables are lines of credit extended by banks that can be endorsed and assigned to vendors as payments for purchases.
The notes payable are generally payable within six months. These short-term notes payable are guaranteed by the bank for their
full face value. In addition, the banks usually require the Company to deposit a certain amount of cash (usually range from 30%
to 100% of the face value of the notes) at the bank as a guarantee deposit, which is classified on the balance sheet as restricted
cash.
The
Company had the following bank notes payable as of December 31, 2018:
|
|
December 31,
2018
|
|
ICBC, due May 5, 2019
|
|
$
|
286,902
|
|
ABC, due various dates from January 4, 2019 to June 27, 2019
|
|
|
2,601,151
|
|
Total
|
|
$
|
2,888,053
|
|
The
Company had the following bank notes payable as of December 31, 2017:
|
|
December 31,
2017
|
|
ICBC, due various dates from January 28, 2018 to May 27, 2018
|
|
$
|
3,052,664
|
|
ABC, due various dates from February 10, 2018 to April 30, 2018
|
|
|
1,384,016
|
|
Total
|
|
$
|
4,436,680
|
|
As
of December 31, 2018 and 2017, $1,439,063 and $3,053,622 cash deposits were held by banks as a guaranty for the notes payable,
respectively. In addition, as of December 31, 2018 and 2017, notes payable totaling $1,448,990 and $1,383,058 were secured by
the personal properties of the Company’s principal shareholders and third party individuals, respectively.
NOTE
9 – INCOME TAXES
The
Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each
entity is domiciled.
Fuling
Global and Total Faith are both offshore holding companies and are not subject to tax on income or capital gains under the laws
of the Cayman Islands and British Virgin Islands, respectively.
Taizhou
Fuling and Great Plastics are incorporated in the PRC and are subject to PRC income tax, which is computed according to the
relevant laws and regulations in the PRC. Under the Corporate Income Tax Law of the People’s Republic of China,
corporate income tax rate applicable to all companies, including both domestic and foreign-invested companies, is 25%.
Taizhou Fuling was recognized as a High-technology Company by Chinese government and subject to a favorable income tax rate
of 15% from year 2012 to 2018. $1,343,322, $715,087 and $231,733 income tax expenses were exempted for the years ended
December 31, 2018, 2017 and 2016, respectively. Per share effect of the tax exemption was $0.09, $0.05 and $0.01 for the
years ended December 31, 2018, 2017 and 2016, respectively.
Domo,
Fuling USA and Direct Link are incorporated in the United States and subject to the U.S. federal and state income tax.
The
following table summarizes income (loss) before income taxes and non-controlling interest allocation:
|
|
For the year ended
|
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December
31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
United States
|
|
$
|
599,898
|
|
|
$
|
90,466
|
|
|
$
|
(2,381,347
|
)
|
Foreign
|
|
|
10,374,099
|
|
|
|
8,963,428
|
|
|
|
14,191,840
|
|
Total
|
|
$
|
10,973,997
|
|
|
$
|
9,053,894
|
|
|
$
|
11,810,493
|
|
Significant
components of the income tax provision were as follows:
|
|
For the year ended
|
|
|
For the year ended
|
|
|
For the year ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
-
|
|
|
$
|
4,455
|
|
|
$
|
-
|
|
Foreign
|
|
|
595,461
|
|
|
|
783,915
|
|
|
|
1,561,404
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
531,275
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,126,736
|
|
|
$
|
788,370
|
|
|
$
|
1,561,404
|
|
The
deferred tax expense (benefit) is the change of deferred tax assets and deferred tax liabilities resulting from the temporary
difference between tax and U.S. GAAP. Our operations in the U.S. have incurred a cumulative net operating loss of approximately
$2,868,000, 3,468,000 and $3,554,000, respectively, as of December 31, 2018, 2017 and 2016. This carry-forward will expire if
is not utilized by 2036. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces
the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized.
For
the years ended December 31, 2018, 2017 and 2016, management believes that the realization of the benefit arising from the losses
of certain U.S. subsidiaries appears to be uncertain and may not be realizable in the near future. Therefore, 100% valuation allowances
of $420,056, $605,081 and $625,742 have been provided against the deferred tax assets of these subsidiaries, respectively.
A
new tax regulation under the Provisional Regulations of The People’s Republic of China Concerning Income Tax on
Enterprises promulgated by the PRC took effect on May 7, 2018. The new tax regulation allows companies to expense in full all
machinery and equipment acquired between January 1, 2018 to December 31, 2020 instead of depreciate over depreciation period,
except for any asset with unit price over $0.7 million (RMB 5 million). Thus, deferred tax liabilities resulted from the
temporary difference. Until the end of 2018, the Company acquired new machinery and equipment of $3,852,713 (RMB 26.5
million) in total, which were qualified to be fully deducted from taxable income in 2018, and incurred the deferred tax
liabilities of $577,826 as of December 31, 2018.
On
December 22, 2017, the U.S. enacted the “Tax Cuts and Jobs Act” (the “Act”). Under the provisions of the
Act, the U.S. corporate tax rate decreased from 35% to 21%. Since the Company has a December 31 fiscal year-end, a U.S. statutory
federal rate of 21% rate is applied to the provision for income tax from the fiscal year of 2018.
The
following table reconciles the statutory rates to the Company’s effective tax rate:
|
|
For the year ended December 31,
|
|
|
For the year ended December 31,
|
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
U.S. Statutory rates
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(19.4
|
)
|
|
|
(32.5
|
)
|
|
|
(33.8
|
)
|
Foreign income tax rate
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
Effect of favorable income tax rate in certain entity in PRC
|
|
|
(10.5
|
)
|
|
|
(8.1
|
)
|
|
|
(11.5
|
)
|
R&D tax credit (1)
|
|
|
(3.5
|
)
|
|
|
(2.4
|
)
|
|
|
(1.5
|
)
|
Change in valuation allowance
|
|
|
(1.7
|
)
|
|
|
(0.3
|
)
|
|
|
8.0
|
|
Non-taxable permanent difference (2)
|
|
|
(0.6
|
)
|
|
|
(7.0
|
)
|
|
|
7.0
|
|
Effective tax rate
|
|
|
10.3
|
%
|
|
|
8.7
|
%
|
|
|
13.2
|
%
|
|
(1)
|
From
1 January 2018 to 31 December 2020, for R&D expenses incurred for new technology, new products, or new craftsmanship, an extra
75% of the actual expenses incurred are also tax-deductible as an incentive.
|
|
(2)
|
It
represents expenses incurred by the Company that were not deductible for PRC income tax and income (loss) generated in countries
with no income tax obligations.
|
NOTE
10 – SALE LEASEBACK
|
(1)
|
In
October 2016, The Company has entered into a sale leaseback arrangement and sold certain machinery located in China to an unrelated
third party for approximately $3,651,346 (RMB 25,112,500), and subsequently leased back the machinery for 24 months for a total
amount of approximately $3,804,092 (RMB 26,163,022). The Company was required to make a security deposit of approximately $730,269
(RMB 5,022,500) for the leaseback. The leaseback has been accounted for as a capital lease. The title of the machinery will be
transferred back to the Company upon the last payment from the Company. A one-time processing fee of $23,223 (RMB 159,716) was
paid by the Company related to this lease. Since the machinery was sold exceeding its carrying value, the Company also recognized
a deferred gain of $180,849 (RMB 1,243,810) on this transaction, which will be amortized over 24 months as an income. In addition,
unrecognized financing charge of $177,853 (RMB 1,223,203) was recognized for the capital lease, which will be amortized over 24
months as an interest expense. The Company repaid the lease as of December 31, 2018. All deferred gain and unrecognized financing
charge were fully amortized as of December 31, 2018.
|
The
lease was fully repaid in June 2018 prior to its maturity:
Total lease payment
|
|
$
|
3,804,106
|
|
Less: imputed interest and principal
|
|
|
(3,804,106
|
)
|
Total current portion of sale leaseback obligation as of December 31, 2018
|
|
$
|
-
|
|
Interest
expense incurred for the years ended December 31, 2018, 2017 and 2016 amounted to $39,148, 128,069 and $14,858, respectively.
|
(2)
|
In
May 2017, the Company has entered into another sale leaseback arrangement and sold certain machinery located in China to an unrelated
third party for approximately $2,573,572 (RMB 17,700,000), and subsequently leased back the machinery for 36 months
for a total amount of approximately $2,750,504 (RMB 18,916,864). The Company was required to make a security deposit
of approximately $514,714 (RMB 3,540,000) for the leaseback. The leaseback has been accounted for as a capital lease. The
title of the machinery will be transferred back to the Company upon the last payment from the Company. A one-time processing fee
of $15,441 (RMB 106,200) was paid by the Company related to this lease. Since the machinery was sold under its carrying value,
the Company also recognized a deferred loss of $241,206 (RMB 1,658,918) on this transaction, which will be amortized over
36 months as an expense. In addition, unrecognized financing charge of $96,954 (RMB 666,811) was recognized for the capital lease,
which will be amortized over 36 months as an interest expense.
|
The
minimum payments for the remaining lease term of 17 months from December 31, 2018 to May 18, 2020 are as follows:
Total lease payment
|
|
$
|
2,750,504
|
|
Less: imputed interest and principal
|
|
|
(1,452,961
|
)
|
Total sale leaseback obligation as of December 31, 2018
|
|
|
1,297,543
|
|
Less: current portion of sale leaseback obligation
|
|
|
(915,912
|
)
|
Long term payable - sale leaseback as of December 31, 2018
|
|
$
|
381,631
|
|
According
to the sale leaseback agreement, future obligations for payments of sale leaseback are as below:
Twelve months ended December 31, 2018
|
|
|
|
2019
|
|
$
|
915,912
|
|
2020
|
|
|
381,631
|
|
Total
|
|
$
|
1,297,543
|
|
Interest
expense incurred for the years ended December 31, 2018, 2017 and 2016 amounted to $76,700, $64,231 and $0, respectively.
|
(3)
|
In
February 2018, the Company has entered into another sale leaseback arrangement and sold certain machinery located in China to
an unrelated third party for approximately $5,379,784 (RMB 37,000,000), and subsequently leased back the machinery for
36 months for a total amount of approximately $5,784,874 (RMB 39,786,052). The Company was required to make a security
deposit of approximately $1,075,957 (RMB 7,400,000) for the leaseback. The leaseback has been accounted for as a capital
lease. The title of the machinery will be transferred back to the Company upon the last payment from the Company. A one-time processing
fee of $32,279 (RMB 222,000) was paid by the Company related to this lease. Since the machinery was sold under its carrying
value, the Company also recognized a deferred gain of $403,158 (RMB 2,772,759) on this transaction, which will be amortized
over 36 months as an expense. In addition, unrecognized financing charge of $277,503 (RMB 1,908,556) was recognized for the capital
lease, which will be amortized over 36 months as an interest expense.
|
The
minimum payments for the remaining lease term of 26 months from December 31, 2018 to February 18, 2021 are as follows:
Total lease payment
|
|
$
|
5,784,874
|
|
Less: imputed interest and principal
|
|
|
(1,598,991
|
)
|
Total sale leaseback obligation as of December 31, 2018
|
|
|
4,185,883
|
|
Less: current portion of sale leaseback obligation
|
|
|
(1,931,947
|
)
|
Long term payable - sale leaseback as of December 31, 2018
|
|
$
|
2,253,936
|
|
According
to the sale leaseback agreement, future obligations for payments of sale leaseback are as below:
Twelve months ended December 31,
|
|
|
|
2019
|
|
$
|
1,931,946
|
|
2020
|
|
|
1,931,946
|
|
2021
|
|
|
321,991
|
|
Total
|
|
$
|
4,185,883
|
|
Interest
expense incurred for the years ended December 31, 2018, 2017 and 2016 amounted to $206,803, $0 and $0, respectively.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Rent
Commitment
The
Company’s subsidiary Fuling USA leases manufacturing facility under operating leases. Operating lease expense amounted
to $534,589, $534,077 and $454,223 for the years ended December 31, 2018, 2017 and 2016, respectively.
On
December 20, 2018, the Company entered into a five year lease agreement with a third party for its manufacturing facility in Mexico
(see Note 15). in Mexico. The rent expense is $10,514 for the year ended December 31, 2018.
Future
minimum lease payments under non-cancelable operating leases are as follows:
Twelve months ended December 31,
|
|
|
|
2019
|
|
$
|
866,971
|
|
2020
|
|
|
913,242
|
|
2021
|
|
|
864,040
|
|
2022
|
|
|
815,053
|
|
2023
|
|
|
528,395
|
|
Thereafter
|
|
|
196,931
|
|
Total
|
|
$
|
4,184,632
|
|
Letters
of Credit
As of December 31, 2018 and 2017, the Company had $5,147,960
and $6,546,920 outstanding in trade letters of credit, respectively.
Purchase
Commitment
As of December 31, 2018, the Company had no purchase commitments
for construction. These commitments represent the amount of agreements signed but yet not paid. Pursuant to the signed agreement,
the payment is not due until the construction is completed, and there is no a fixed deadline for the completion of construction.
Litigation
The Company’s subsidiary Fuling USA is a defendant-counterclaimant
in pending litigation in the District Court for the District of Connecticut in the U.S. The plaintiff asserted causes of action
for breach of contract, trademark infringement and related unfair competition claims under the Lanham Act, trade secret misappropriation,
interference with a business opportunity, breach of fiduciary duty, and violation of the Connecticut Unfair Trade Practices Act.
Fuling USA filed an answer and counterclaims seeking declaratory judgment of non-infringement of the trademark, cancellation of
the trademark registration, breach of contract, and unjust enrichment. Until the date of this filing, the litigation has not been
closed but no material contingent liability was expected.
NOTE
12 – RELATED PARTY TRANSACTIONS
The
Company rents space from one of its related parties. For the years ended December 31, 2018, 2017 and 2016, the total rent expense
was $55,715, $54,550 and $55,484, respectively.
Due
from a related party amounted to $28,242 and $0 as of December 31, 2018 and 2017, respectively. It is outstanding rent from Great
NM.
Accounts
payable to Great NM amount to $82,014 and $0 as of December 31, 2018 and 2017, respectively.
NOTE
13
–
EQUITY
Statutory
Reserve
The
Company is required to make appropriations to certain reserve funds, comprising the statutory surplus reserve and the discretionary
surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC
(“PRC GAAP”). Appropriations to the statutory surplus reserve are required to be at least 10% of the after-tax net
income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Appropriations
to the surplus reserve are made at the discretion of the Board of Directors. As of December 31, 2018 and 2017, the balance of
statutory reserve was $5,532,945 and $4,617,039, respectively.
Share
Issuance
On
November 18, 2018, the Company granted 15,705 shares to its Chief Financial Officer. On November 18, 2017, the Company granted
15,705 shares and 8,000 shares collectively to its Chief Financial Officer and two directors, respectively. On November 18, 2016,
the Company granted 15,705 shares and 8,000 shares collectively to its Chief Financial Officer and two directors, respectively.
On November 2, 2015, the Company granted 15,667 shares and 12,000 shares collectively to its Chief Financial Officer and three
directors, respectively. On November 18, 2015, the Company granted 38 shares to its Chief Financial Officer. The Company recorded
$105,276, $58,867 and $123,339 as stock based compensation expense for the years ended December 31, 2018, 2017 and 2016, respectively.
NOTE
14 – SEGMENT REPORTING
ASC
280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent
with the Company’s internal organizational structure as well as information about geographical areas, business segments
and major customers in financial statements for details on the Company’s business segments. The Company uses the “management
approach” in determining reportable operating segments. The management approach considers the internal organization and
reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance
as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker,
reviews operation results by the revenue of different products. Based on management’s assessment, the Company has determined
that it has only one operating segment as defined by ASC 280.
The
following table presents revenue by major products for the years ended December 31, 2018, 2017 and 2016, respectively.
|
|
For the years ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
Cutlery
|
|
$
|
66,558,851
|
|
|
$
|
62,104,253
|
|
|
$
|
53,206,758
|
|
Straws
|
|
|
23,572,926
|
|
|
|
18,631,276
|
|
|
|
14,324,897
|
|
Cups and plates
|
|
|
37,439,353
|
|
|
|
33,536,297
|
|
|
|
27,626,586
|
|
Others
|
|
|
11,093,142
|
|
|
|
9,936,680
|
|
|
|
7,162,448
|
|
Total
|
|
$
|
138,664,272
|
|
|
$
|
124,208,506
|
|
|
$
|
102,320,689
|
|
The
following table presents revenue by geographic areas for the years ended December 31, 2018, 2017 and 2016, respectively.
|
|
For the years ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Revenue from United States
|
|
$
|
118,307,987
|
|
|
$
|
106,563,934
|
|
|
$
|
92,729,983
|
|
Revenue from Europe
|
|
|
6,621,940
|
|
|
|
6,101,139
|
|
|
|
3,172,868
|
|
Revenue from Canada
|
|
|
1,635,667
|
|
|
|
1,943,946
|
|
|
|
982,106
|
|
Revenue from China
|
|
|
8,286,146
|
|
|
|
7,740,720
|
|
|
|
3,839,176
|
|
Revenue from other foreign countries
|
|
|
3,812,532
|
|
|
|
1,858,767
|
|
|
|
1,596,556
|
|
Total
|
|
$
|
138,664,272
|
|
|
$
|
124,208,506
|
|
|
$
|
102,320,689
|
|
Long-lived
assets of $58,848,571 and $4,271,140 were located in China and the United States, respectively, as of December 31, 2018. Long-lived
assets of $56,808,223 and $3,136,106 were located in China and the United States, respectively, as of December 31, 2017.
NOTE
15 – SUBSEQUENT EVENTS
In January to March 2019, the Company repaid approximately $5.2
million short term bank loans and $1.8 million notes payable that become due. The Company also borrowed approximately $7.4 million
short term bank loans as well as approximately $2.0 million notes payable from various banks in China. All the loans and notes
payable are guaranteed by its shareholders, related parties and third parties.
In
December 2018, the Company announced its plan to set up a manufacturing factory (the “Mexico Factory”) in Monterrey,
Mexico. In December 2018, the Company signed a building lease with Interpuerto Industrial Park in Monterrey, Mexico and
a service agreement with a local shelter service company to help with administrative, accounting, compliance, import/export, human
resources, etc., at the Mexico Factory. Factory remodeling is expected to start in April 2019, followed by equipment installation
and testing and worker recruitment in May. We expect that the first phase of the Mexico Factory will have an annual design capacity
of 10,000 tons and will be primarily used for producing paper straws and plastic straws and paper cups serving the U.S. market.
The Company expects to launch commercial production at the Mexico Factory around July 2019.
F-27